Amazon Stock: This $5 Billion Bet Is Bleeding Money But Could Pay Off In Future

Amazon.com, Inc (NASDAQ:AMZN) continues to lose money in its international segment.

The eCommerce giant Amazon.com, Inc (NASDAQ:AMZN) recently reported its third quarter earnings. And, the results were much better than anyone expected. The company earned 52 cents per share in the third quarter over seven times higher than analysts expectation of just 7 cents. The revenue also came in much ahead of what Wall Street was expecting. This strong result propelled Amazon stock to a much higher territory. Amazon stock had gained 13% after the earnings, its biggest daily move in the recent history. However, the eCommerce segment continued to bleed money, especially its international segment. With Amazon.com, Inc continuing to invest heavily overseas, especially in India, the losses are likely to continue. The question is will it pay off in the long run?

The International segment continues to bleed money.

Amazon has continued to invest billions of dollars in international markets. As a result, the international segment revenues have continued to show strong growth. But so have the losses. International segment losses have widened multifold from $121 million in the first quarter of 2016 to $936 million in the third quarter of this fiscal. These widening losses have kept Amazon stock under pressure in the past. Last quarter, Amazon stock had tanked after the company had reported a huge miss on its bottom line due its international segment losses. And one of the major contributor to this widening losses has been company’s India operations.

Amazon.com Inc has made a $5 billion bet.

India has become a central part of the Amazon story. The company has committed $5 billion in capital for its India operations. The recent reports and comments by senior managers indicate that this figure could go even higher. So why is Amazon making huge investments in India? Well, Indian eCommerce market is expected to grow at a rapid pace in the coming years. This growth will be driven by rising middle class, higher mobile penetration, and faster internet services. The share of eCommerce segment as a percentage of the total retail market is expected to grow from 2% of total retail now to 12% in 2026 according to Morgan Stanley. The firm estimates that eCommerce market in India is set to grow from $15 billion in 2016 to $200 billion by 2026. This is a huge growth opportunity. And having lost China, Amazon wants to make most of this fast-growing market.

The company has made several inroads in the South Asian nation. Amazon.com, Inc recently announced that it is the most visited and the fastest growing marketplace in India according to data from comScore and SimilarWeb. The company has also seen wide acceptance for its Prime service. In the latest quarter earnings call, the company said that “we’ve had more Prime members join in India than in any other country in the first 12 months. ” Of course, what Amazon failed to say was that annual Prime subscription in India costs around $8, lower than monthly subscription fees in the U.S. Indian prime members also get the prime video bundled with the prime subscription, which is really a great deal. The eCommerce giant also launched Echo and Fire TV stick during the Diwali festive season in India.

Amazon is facing competition from Flipkart.

However, Amazon is not the only company which is eyeing the Indian eCommerce market. It is facing a strong competition from the homegrown eCommerce company Flipkart which recently raised $1.4 billion from Tencent, eBay and Microsoft. Flipkart also has access to the deep pockets of Mayosi Son. This has allowed them to meet Amazon’s price discount. During the recent Diwali sales, which saw online sales jump by 40% from last year,  Flipkart appeared to have won a major victory over Amazon. Flipkart’s share of festive season sales, increased to 50 percent from 45 percent last year, capturing much of the market lost by Snapdeal, as per industry estimates.

Amazon had 35% market share, unchanged from last year according to Forrester Research. However, the company claims otherwise. Amazon India had claimed that the Great Indian Festival was its biggest ever shopping event, and that it had grabbed a 44% share of total customers and shopping volume. Amazon continues to be bullish on India. Amazon India recently said that the online retailer plans to double down on its investments in India, especially in key areas such as digital payments and the Prime membership programme.

Amazon has plans of producing 18 original series in the country. It has recently signed a five-year content deal with Bollywood actor Salman Khan’s home production Salman Khan Ventures. The deal gives Amazon exclusive rights to all his upcoming films even before their television premiere. Inside Edge experience suggests that local content along with economical pricing of Prime subscription (around $7.5 per year) will grab eyeballs for the streaming giant, However, it will also cost tons of money. Indian operations will continue to weigh on Amazon’s earnings for the next few quarters. Of course, Amazon shareholders are currently not worried about profitability as long as the company continues to show rapid revenue growth. The question is will these investments generate value for Amazon in future? We continue to remain bullish on Amazon stock going into the holiday season.