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Shares of (Nasdaq: AMZN  ) took a hit last night, despite a robust quarter out of the country's leading online retailer.

Net sales climbed 39% to $7.56 billion. Earnings inched a mere 16% higher to $0.51 a share, but the results were still better than expected. Analysts were targeting a profit of $0.48 a share on $7.35 billion in net sales.

In other words, Mr. Market knew all about the margin contraction. The moment that Amazon decided to take on Borders (NYSE: BGP  ) , Sony (NYSE: BGP  ) , and Barnes & Noble (NYSE: BKS  ) with cutthroat e-reader pricing, the pros knew that this wouldn't be an earnings growth story until the shakeout is complete.

The market's problem came largely from Amazon's guidance. The midpoint of its net sales range for the holiday quarter is actually ahead of the $12.3 billion that Wall Street was looking for, but the midpoint of its admittedly wide range for operating income is actually a year-over-year decline.

Save your "ouch" for a company that needs it. When you're selling beefed-up Kindles for as little as $139, this isn't a time to be counting pennies.

Investors seemed to get it with Netflix (Nasdaq: NFLX  ) this week. The movie star soared yesterday despite posting lower than expected earnings and keeping its revenue and profit targets largely intact. The catalyst? Netflix nabbed 1.9 million during the period, and its outlook calls for even more net new couch potatoes during the current quarter.

We really don't see this at Amazon, because the company has been reluctant to spill the beans as to how many Kindles it has actually sold. We know it's in the millions -- and nothing more.

A little clarity out of the e-tailer would help. It has never had a problem widening the breadth of its digital books initiative. You don't need a Kindle to read a Kindle book these days, as most smartphones, tablets, and PCs will do. Amazon just announced Kindle book availability on Research In Motion's (Nasdaq: RIMM  ) BlackBerry PlayBook, and that tablet won't be out until early next year!

Let's appreciate this quarter for one of two things that will pay off in the long run.

  • Amazon is selling a ton of Kindles, hence the iffy operating margins.
  • Amazon has excellent momentum heading into the crucial holiday selling season.

This is about something bigger than where operating margins clock in during the next three months.


Were you disappointed in Amazon's report or the market's reaction? Share your thoughts in the comment box below. and Netflix are Motley Fool Stock Advisor selections. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been shopping online since the early 1990s, even before was around. He does not own shares in any of the stocks in this article, except for Netflix. 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 (1) | Recommend This Article (2)

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  • Report this Comment On October 22, 2010, at 1:13 PM, Melaschasm wrote:

    Amazon's results were better than I expected. Their Q4 profit guidance is disapointing. Assuming that weaker/flat profits is because of an increased focus on growing market share, this could create a good buying opportunity.

    I really like amazon, but todays P/E makes buying more shares painful. A steep drop in the P/E ratio would be a buying opportunity in my opinion.

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