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Amazon leads tech rivals in an era of shifts



Historians will define the current era of technology, and indeed economics, culture, and society in general as the era of change, a seemingly constant departure from traditional boundaries and perceptions of how things are made.

Retail has relocated to the Internet; that's how you saw films; Workers have moved from their desks to their mobile devices; Data processing shifted from the high-bay warehouses once built in companies to a handful of huge cloud computing operations that took up more databases and applications around the world. The expert judgment has shifted to either the wisdom of the crowd or the trial-and-error brute-force efforts of artificial intelligence.

The layer's favorite example is Amazon.com (Ticker: AMZN). It is clear that founder and CEO Jeff Bezos had the vision to think the world in his own way, the willingness to seize every opportunity as long as a lot of money had to be shifted, regardless of the intricacies of traditional profit and loss ,

Bezos has overturned industries by not caring that the convention says they can not be attacked and put out of orbit. And he's got the last laugh: Amazon's stock jumped 5% on Thursday, as the company's earnings surpassed Wall Street expectations, thanks to rising profit margins in various parts of its business. This was 1

% despite the lack of revenue expectations.

"Profitability has admittedly been … uneven" at Amazon, Mark Mahaney of RBC Capital Markets, a bull of the stock, summarized most of Amazon's history. "But now, it's uneven UP, thanks to what we consider to be the best sales mix story in technology," he added in his latest report. Positive profit surprises are more and more the norm on Amazon, as they are developing new businesses with higher margins than the traditional gossamer commercial margins.

Amazon is dominant in cloud computing, with a 26.9% operating profit margin of 5.6% on the company average. According to Youssef Squali of SunTrust Robinson Humphrey, the newer advertising business is at a level of $ 8-10 billion a year. Amazon does not announce any financial data for the ad business, but Squali believes it is "operating at a very high margin," and Amazon CFO, Brian Olsavsky, has made it clear that helping to increase profits.

Anyone in the non-Amazon tech industry – any company that follows the logic of staying neat in their bailiwick – will have a hard time adjusting to the changing rhythm. Instead of shifting the world around its axis, as Bezos has done, they often try to move from a narrow place to a more promising place.


Facebook (FB) is an example. His stock was punished on Thursday with a historic flogging. Facebook offered a dramatically lower sales growth outlook after saying that it will draw attention to an online advertising opportunity that pays less for each ad. "Stories," as they are called, are short videos of users on Facebook that disappear after 24 hours. You take over the screen of a device when you watch it. Advertisers find this less attractive than traditional Facebook postings, so trying to change that relationship with ad buyers is a tough sell.

Others also have mixed successes. Apple still benefits from the sale of the device, which many of the world's wealthy information workers are willing to pay more than $ 1,100.

As one of the largest buyers of semiconductors in the world, Apple may shift the industry's manufacturing priorities to ensure that the iPhone first takes on new features. The "Face I.D." Feature that unlocks the iPhone at a glance is a premiere on a mobile device, and Apple was at least a year ahead of its competitors because orders for the underlying components were filled out first.

At the same time, Apple has been trying for years to become a software and services company with little success for its stock. The forward price / earnings ratio, based on the forecast profit for the next financial year, is 14.5 times without taking into account cash and cash equivalents. That's a bit of 14 times at this time last year. The small profit disproves the fact that Apple's services business is gigantic, reaching $ 37 billion this year. Services represent an increasing percentage of sales, currently 15%, and have a higher margin than the rest of their businesses, so you would think that investors would allocate the company a richer multiple. Apple has not spent his life like Amazon moved and changed. The relocation is an unpleasant and sudden shock to investors who believe they can count on Apple as a high-growth widget maker rather than as a service provider.

The examples of other major technology companies are even more unpleasant and test the patience of investors. AT & T (T) is shifting to a media company. Intel (INTC) said last week that its gross profit margin will decline by about two percentage points this year. That's because Intel has little pricing power as it focuses its attention on new markets outside of its traditional PC and server business. Although Western Digital (WDC) was in a hot data storage segment last week, indicated that pricing pressures have intensified and its earnings forecast is collapsing.


Make all these changes and dislocations what economists call low switching costs. It's always easier to switch a provider of this or that asset as easily as switching from one website to another.

The tech world has no alternative to Amazon's relentless pursuit of the next possibility of disruption at the moment. If you can not beat it then try to be as brave as it is, just as annoying, albeit belated and awkward. As long as the low interest rates keep a window open for borrowing, big and small companies will spend money to be ahead of the wave, even through capital investment and M & A. Better for any ambitious technology company to make bold moves without permission and later Request forgiveness of Wall Street.

Email: editors@barrons.com


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