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Lucrative Cloud, Advertising Businesses Power Amazon Earnings

Amazon’s outsize second-quarter earnings caught analysts by surprise, as the company’s profits, revenue and sales grew faster than expected.

“Amazon’s powerful commerce engine keeps chugging along and is finally beginning to drop more to the bottom line,” eMarketer principal analyst Andrew Lipsman said of the company’s $52.9 billion quarterly sales.

“But the bigger story coming out of earnings is the significant margin expansion being driven by the acceleration in the cloud and advertising businesses,” Lipsman added. “There’s still a lot of runway for both of these higher margin businesses, and with the rest of the business continuing to fire on all cylinders, the question now is whether we’ll see Amazon hit a $1 trillion market cap sooner rather than later.”

Amazon CFO Brian Olsavsky said AWS customers are “just branching out to a lot of new products from us,” such as machine learning, artificial intelligence, Internet of Things, serverless computing and database and analytics.

Expanding 132 percent year over year, advertising was Amazon’s fastest-growing segment, raking in $2.2 billion in the quarter, Ad Age reported. By contrast, eMarketer had predicted that Amazon’s total global net digital ad revenue would reach $3.37 billion this year, representing growth of 58 percent. Though Facebook and Google continued to lead in digital advertising, brands appreciate that by advertising on Amazon, they’re exposing their content to consumers who already are in some form of shopping mode.

Amazon will continue growing its advertising business by focusing on improving its measurement capabilities “so advertisers understand what outcomes they’re driving on our properties,” Olsavsky said. “We think that we’re uniquely positioned to show them the direct benefit of their advertising.”

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eMarketer principal analyst Paul Verna said Amazon, the No. 2 player in video streaming services, “is expected to grow its user base at a faster rate than market leader Netflix.” Competitor Walmart is said to be considering launching its own video offering aimed at the Middle America demographic, which could be a response to Amazon’s success in the streaming arena. It won’t be an easy market to crack, though, given all of the competition from Hulu, Disney, Apple and others—plus Amazon’s continued content investments.

Amazon will spend “up to $5 billion on content development and licensing in 2018, signaling that it’s playing to win in the high-stakes contest for subscription dollars,” Verna said.

Amazon said it’s now the most-visited website in India, a market in which it’s battling Walmart—which earlier this year took a majority stake in e-commerce upstart Flipkart.

A year on from the Whole Foods acquisition, Amazon is finally making a real push to integrate the businesses and milk the opportunities, which eMarketer principal analyst Patricia Orsini described as the “final frontier.”

“As Prime members increasingly scan their mobile apps to get discounts, Amazon is collecting more data about consumers’ grocery purchase habits,” Orsini said. “This will help Amazon, not only to curate product selection in-store, but it will give them better insights into what online shoppers might buy. And, as Amazon continues to develop its private label brands, expect food and beverage products to grow.”

With so many business units driving strong growth, Amazon has untapped resources to build out its private-label apparel business, which could account for $25 billion in sales in four year’s time.