Amazon’ s satellite internet service could take the company’s business empire to new heights. But right now on Earth, investors are worried about what getting there will do to profits. Amazon is ramping up spending on Project Kuiper, a network of low Earth orbit satellites aimed at providing high-speed internet around the world, as it prepares to begin commercial service in 2025. It’s not cheap: Amazon said years ago that investments in Kuiper will total more than $10 billion. The difference now is that spending is readily apparent and drawing increased scrutiny after Kuiper costs helped squeeze margins in Amazon’s all-important North American operating segment during the second quarter . Shares of Amazon sold off hard on second-quarter earnings before bottoming a few sessions later. It’s up about 3% in the nearly three months since that report, underperforming the S & P 500 , which has advanced about 7% in the same stretch. As Amazon pours substantial resources into the Kuiper initiative, Wall Street has questions. Among them: How long will the new venture be a drag on Amazon’s bottom line? And how big will the future payout be? For now, analysts and investors are looking to Amazon’s third-quarter earnings report Thursday night for more clarity. “The market usually has skepticism about multibillion investments that won’t pay off for years,” said Jeff Marks, the Investing Club’s director of portfolio analysis. That’s especially true in this moment because a key prong to the Amazon investment thesis in recent years has been its improving profitability as CEO Andy Jassy dramatically cut costs through layoffs, canceled projects and a retooled fulfillment network that increases speed while lowering the cost of delivering packages to doorsteps. Cloud unit Amazon Web Services, its longtime profit engine, has played a big role in the efforts, delivering impressive margins as topline growth picked up steam . But now its e-commerce business is facing some headwinds — including inflation-wary consumers and more orders of less-profitable everyday items — at the same time the pace of margin expansion at AWS is expected to moderate amid heavy investments in AI computing. Those dynamics are putting the spending on a money-losing, still-experimental endeavor like Kuiper in a different light. Indeed, Kuiper’s pinch combined with a normalization at AWS has “tempered expectations for near-term operating income growth,” Wedbush Securities wrote last week in a note previewing Amazon’s upcoming earnings report. Nevertheless, analysts argued the “long-term margin trajectory remains intact,” noting the success of higher-margin revenue streams such as advertising and AWS. Amazon also is no stranger to losing money on a new offering, such as AWS nearly two decades ago, while building it into an established service. Long-term investors have been wise to stick with the stock through those periods, Marks said, because shares tend to outperform when the company is harvesting profits from prior investing cycles. Kuiper could be the latest successful chapter in the Amazon playbook after these investments run their course. AMZN YTD mountain Amazon’s stock performance so far in 2024. Amazon began developing Kuiper in 2018, making a bold bet that it could be another of the company’s transformative businesses. The initiative is housed under Amazon’s devices and services unit , which is currently home to products such as the Kindle, Echo smart speakers, Fire TV devices and Ring doorbells. Amazon hopes that Kuiper could bring broadband connectivity to some 400 million to 500 million households that currently lack it. The company also believes Kuiper can deliver reliable internet to businesses and governments. “I think that’s a very significant opportunity that has some things that are reminiscent of AWS about it,” CEO Andy Jassy said of Kuiper during Amazon’s annual meeting in 2022. The Federal Communications Commission in July 2020 granted Amazon approval to deploy and operate a network of 3,236 satellites. The first two prototypes were launched in October 2023 and later deemed fully successful in testing . Now, Amazon is boosting production of the satellites in order to start deploying its satellite constellation in early 2025 and begin commercial service later that year. The company has a deadline to meet: To comply with its FCC license, Amazon needs to launch and operate at least half its satellites by July 2026 . Entering this phase of Kuiper’s lifecycle is why losses from the project are mounting. Simply put, there’s much more spending without revenue coming in yet. Wall Street estimates on the exact magnitude vary. In a recent note, Evercore ISI said Amazon could see losses from Kuiper between $600 million and $1 billion in its October-to-December quarter — that’s up from an estimated $250 million in the second quarter. Looking ahead to 2025, the firm projected that Kuiper’s losses could exceed $5 billion before “meaningful revenue” is generated. Bank of America, on the other hand, estimates around $3.5 billion in Kuiper spending next year. The Kuiper spending estimates might seem steep, but the analysts aren’t telling investors to dump shares. In their notes discussing Kuiper, both Evercore and BofA reiterated their buy-equivalent ratings on the stock. For its part, Morgan Stanley views the near-term financial hit as “manageable,” according to an Oct. 3 note. In 2024, analysts project a roughly $700 million impact to earnings before interest and taxes, a measure of operating income commonly abbreviated as EBIT. Their model incorporates $600 million worth of EBIT headwinds in 2025. For context, Wall Street expects Amazon to report operating income of $62.3 billion in 2024 and $78.06 billion in 2025, according to estimates compiled by FactSet. Part of Morgan Stanley’s case for looking through the Kuiper dent is that Amazon should see offsetting benefits to EBIT in other parts of its business, namely falling shipping and fulfillment costs and additional headcount reductions. The big-picture rationale for stomaching Kuiper losses is that further down the road, it could become a significant business for Amazon. In fact, analysts at Evercore believe some investors may be underappreciating the size of the Kuiper market opportunity, the profitability characteristics of a satellite internet business, and Amazon’s advantages operating in the still-evolving industry. The firm pointed to industry leader Starlink — the high-speed satellite internet service that is part of Elon Musk’s privately held SpaceX — to help contextualize what could be ahead for Kuiper. Evercore cited an estimate that Starlink will bring in roughly $6.6 billion in revenue in 2024, up from almost no revenue in 2020, the year customer beta testing began. Starlink has more than 4 million users across the world. Evercore estimated Starlink’s current EBITDA margin to be around 50%, while publicly traded peer Viasat just reported a roughly 36% margin in its June quarter. Considering those data points, “we believe Kuiper could achieve an attractive margin profile at scale,” Evercore said. EBITDA is short for earnings before interest, taxes, depreciation, and amortization. Although Amazon has not disclosed Kuiper’s business model or pricing structure, investors can use Starlink’s current offering to provide a reference. For personal use, Starlink’s cheapest plan starts at $50 a month and is targeted at on-the-go users, such as campers. It also has a $120-a-month offering for residential households. Business plans range from $140 to $5,000 a month. Evercore analysts believe Kuiper is well-positioned to succeed as part of the Amazon ecosystem, noting synergies with AWS’ existing cloud infrastructure and the potential to bundle the service with Prime. They estimate that even modest penetration could yield significant returns: Just 1% of Amazon’s global Prime members signing up for Kuiper could bring in $750 million in annual revenue for Kuiper. Now consider margins of competitors, and the profit potential for Kuiper starts to look substantial. “If Evercore is right about Amazon’s strategic rationale, then this will be yet another big investment that will pay off dramatically in the future,” the Club’s Marks said. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of the stocks.) 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The “ultra-compact” version of the Project Kuiper
Amazon
Amazon’s satellite internet service could take the company’s business empire to new heights. But right now on Earth, investors are worried about what getting there will do to profits.
