Amazon's Surprise

Amazon.com Inc. reported a strong holiday quarter, calming Wall Street’s concerns that the company was headed for a slowdown.

Profit beat expectations, helped by the cloud-computing division, and investors cheered a price hike for the company’s Prime subscription service. The shares jumped as much as 19% in extended trading.

The reaction highlights the importance of Amazon’s diversification from its e-commerce roots. Online store sales actually declined from last year’s blockbuster gains tied to the pandemic. Yet Amazon’s profitable cloud-computing and advertising businesses combined to more than make up for it.

“Amazon has evolved into a true platform, as more than 50% of its revenue now comes from areas outside of first-party retailing, such as cloud computing and advertising,” said Deren Baker, chief executive officer of market research firm Edge by Ascential.

Amazon in October had warned investors it would spend billions in the holiday period to ensure packages got to customers amid supply-chain bottlenecks and an acute labor shortage. A lot of that spending went into hiring 140,000 workers -- just short of its goal of bringing on 150,000 recruits during the quarter. A spending spree that totaled $22.4 billion.

The massive outlays helped reinforce the value of Prime membership with customers, giving the company confidence to raise the price by $20 to $139 a year -- the first such increase since 2018. Prime, which offers subscribers shipping discounts, video streaming and other perks, helps Amazon convert occasional shoppers into loyal customers. Prime subscribers typically spend more on Amazon than non-members.

Amazon’s most profitable unit, the Amazon Web Services cloud-computing division, generated sales of $17.8 billion, a 40% year-over-year increase, and operating profit of $5.29 billion, topping estimates. Advertising revenue was $9.7 billion, a 32% increase from a year earlier. It was the first time the company disclosed advertising as a separate line item. Previously it was part of the “other” revenue category.