Amazon released its first quarter earnings today, and while the ecommerce giant increased sales by 38%, its income decreased by 33%, thanks to a massive wave of hiring and a 42% increase in operating expenses.
Business is booming for Amazon. The company garnered $9.86 billion in net sales in Q1 2011, up from $7.13 billion in Q1 2010 and more than the $9.53 billion Wall Street expected. That wasn’t the only thing that rose in Amazon’s earnings, though. In Q1 2011, Amazon’s expenses totaled $9.54 billion, up from $6.74 billion a year ago.
The result is that Amazon earned 44 cents per share, far below the 61 cents per share analysts expected this quarter. Amazon is down 0.71% in after-hours trading.
Why did costs rise so quickly? While Amazon mentioned things like investments in its Web Services division and in new office space, the bulk of its expenses is likely from its hiring spree. In Q1 2010, Amazon had 26,100 employees (full-time and part-time, minus contractors). In Q4 2010 (just nine months later), that number rose to 33,700, and in Q1 2011, that number reached an astounding 37,900. That’s a 45% increase of its workforce in just one year.
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What’s Amazon Doing?
We have to ask: why is Amazon hiring so many people? For the answer, all you have to do is look at the breakneck pace at which it has been releasing new products. In the last month alone, Amazon launched Cloud Player, unveiled a $114 ad-supported Kindle and created its own Android app store. The tech giant is also reportedly interested in entering the NFC mobile payment market.
Its rapid growth has also caused it a few headaches it needs to fix, including the issue that caused its cloud computing service to collapse.
It takes a lot of money and a lot of labor to fuel such an ambitious pipeline of products. Just the entry into the NFC mobile payment space would be a multi-million (or multi-billion) dollar endeavor.
And as Amazon has expanded outside of the ecommerce business, it faces stronger competition. It’s no longer worried about companies like Barnes & Noble. Instead, it’s competing against Apple, Google, Rackspace, Microsoft and other leading tech companies that have a lot more money in their pockets.
Amazon believes this is the right time to go after massive growth. It’s a classic strategy for Amazon founder and CEO Jeff Bezos: focus on long-term growth and prospects and ignore short-term earnings. It may upset Wall Street now, but Amazon has proven on multiple occasions that it knows how to create new revenue sources (AWS, Kindle) from scratch. Investors would be wise to bet on Bezos and his vision for the company.