Is Amazon Regressing?

There's a fire sale on margins at Amazon.com (Nasdaq: AMZN  ) . Stock up while you can.

The leading online retailer posted a reasonable quarter last night. Net sales soared 41% to $6.57 billion and would have been slightly higher absent currency fluctuations. Net income climbed 45% to $0.45 a share.

The bottom line growing faster than the top line implies margin expansion -- not contraction -- but let's just say that analysts were expecting substantially more stretching here. Wall Street pretty much nailed Amazon's net sales figure but was holding out for a profit of $0.54 a share for the period.

This is an unusual place that Amazon finds itself. It has topped analyst profit targets in the nine previous quarters before coming well short of where the pros were parked this time.

It's only going to get worse.

Amazon is projecting net sales to grow 27%-40% for the current quarter. That's cool. At its midpoint, the leading online retailer is expecting operating profits to inch a mere 4% higher. That's not cool.

Naturally, investors will conclude that the culprit is Professor Kindle with the rope-a-dope in the e-library. Amazon, Barnes & Noble (NYSE: BKS  ) , and Sony (NYSE: SNE  ) have all slashed prices dramatically on their e-book readers in recent weeks. Even the unlikely Borders (NYSE: BGP  ) crashed the party to get in on the markdown madness.

However, Amazon's strategy appears to favor the Kindle bookstore over the hardware. It has made its e-books platform-agnostic, freely transferrable from all of Apple's (Nasdaq: AAPL  ) iAppliances to all of three leading smartphone families. It has sold three times as many e-books during the first half of the year than it did during the same six months last year.

Amazon also turned heads Thursday in announcing two-year exclusivity on several classic titles. It's a slick move, but the industry will pay if others follow suit. The moment that availability fluctuates from e-reader to e-reader is the day that curling up to a paperback comes back in style.

It may seem like the last thing Amazon would want, but if margins continue to deteriorate as e-readers slalom down to zero and the industry gets commoditized, margins circa late 2009 may not be such a bad throwback look.

What did you think about Amazon.com's quarterly report? Share your thoughts in the comment box below.

Apple and Amazon.com are Motley Fool Stock Advisor choices. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz has been shopping online since the early 1990s, even before Amazon.com was around. He does not own shares in any of the stocks in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 23, 2010, at 4:08 PM, hakuin1 wrote:

    For years is has been evident that the "Fool" is overly confident with Bezos and Amazon. Amazon is a dinosaur. The Kindle is a dinosaur. Look for the sftware that will enable readers to do so much more with downloaded text in terms of cross referencing and internet access. If you bought a Kindle, you wasted your money. Still, the Fool sells Amazon like a pimp at the street corner.

  • Report this Comment On July 23, 2010, at 5:14 PM, EditorJim wrote:

    The problem is that ALL the gurus think that the Kindle and e-books are important to Amazon's bottom line, so exaggerate the effect, both good and bad, of happenings in this minor segment of Amazon business.

    At best, books are 12% of total Amazon sales, if e-books take off, and it looks like they will, you're possibly looking at half of that being converted to e-books, so 6%. If Amazon's margins closed during the quarter, perhaps everybody should be looking at the OTHER 88% of their business to figure out why, and not think the Kindle is the be-all-end-all of Amazon's existence.

    The willingness of stock pickers to link every up and down of Amazon to the Kindle is not only wrong, it's irresponsible given their vast expansion beyond books.

  • Report this Comment On July 23, 2010, at 6:20 PM, hakuin1 wrote:

    Who cares what Amazon's "sales" are? They have yet to give solid evidence of what they have actually "sold" in terms of Kindles and e-books. It's all fiction. And the Fool board propagates it. As for the rest of their retail endeavor, the bricks and mortars are showing greater savvy and flexibility with their new e-commerce. And shoppers like the idea of having a physical and LOCAL presence for inspection, returns and exchanges. Once upon a time Amazon was supposed to have somehow represented something "technological" about purchasing a product, whatever that may have meant. We thought the Kindle was supposed to address that, at least in terms of printed matter, but the result has been a cumbersome, slow, uninspiring piece of tripe that will soon be in the garbage.

  • Report this Comment On October 05, 2010, at 3:55 AM, johnk731 wrote:

    Isn't Amazon more of an eBay company than a bookseller? I can't find it in their reports, but I'll bet they are making a lot more on third-party sales commissions than they could ever make on book sales. I don't think e-books have much to do with any of these companies' success or failure.

    Amazon's report say e-book sales are comparable to hardbacks. Besides textbooks, who buys hardbacks?

    Their report says 1 of their 25 billion annual sales is over mobile devices. If these are any different than web sales, my bet would be on mp3's, not e-books.

    It may be wonderful, it may be the future, but it's not the present. The Kindle is hype.

    Don't get me wrong; I order a lot of stuff through Amazon marketplace. e.g. Protein powder, a Roku, used CDs and books, even batteries. But I've only bought one e-book (a textbook) and it was old school -- web pages on a CD-ROM.

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