Sometimes, good news can be buried so far underneath the bad that it goes unnoticed. Often, you can only recognize it in hindsight -- like the time you were devastated by a breakup with your partner, only to grasp that it freed you up to meet your true love a few weeks later. I'm not professing an ability to see into the future, but I think the recent earnings release by Amazon (Nasdaq: AMZN ) might be an example of a blessing in disguise.
First, the bad news
While Amazon beat expectations for earnings, it had a slight miss on revenue. Though the slight miss might not seem like a big deal for most companies, it is when your price-to-earnings ratio is sky high, like Amazon's.
But the real blow came from the company's guidance for the first quarter: Operating income is expected to decline between 2% and 34% when compared to the first quarter of 2010.
Say what?!
That's right, this e-tailer with a P/E above 65 said its growth wouldn't just slow. It was expected to head south. The market predictably punished Amazon, falling to $171.14 the day after earnings. This was more than 10% off the all-time high the stock had reached the week before.
A silver lining
Company CFO Tom Szkutak stated the reason for the disappointing guidance was capacity investments. This basically means that Amazon will be building out its infrastructure. Most likely, these investments will include building new fulfillment centers. The centers cut down on the wait customers have between ordering items and having them delivered to their front step. While costly in the short term, this further reinforces my confidence in Amazon for two reasons.
Customer satisfaction
As a CEO, Jeff Bezos tends to buck conventional wisdom. Instead of focusing on profitability as the company's sole metric to measure, he instead focuses on more qualitative aspects of the company -- like the level of customer satisfaction. Critics scoffed when Amazon allowed negative reviews of company products to appear on its website. Years later, I think it's pretty clear that Bezos was on to something. While competitors such as Overstock (Nasdaq: OSTK ) and eBay (Nasdaq: EBAY ) are down 78% and 44%, respectively, since 2005, Amazon's stock is up just short of 300%. My guess is customer satisfaction had a lot to do with it.
An impenetrable moat
It's not easy being an online retailer. Amazon had been around for seven years before it turned a profit in the fourth quarter of 2001. Clearly, a ton of capital and faith had to be placed in the hands of Bezos by investors who wanted to see their money grow.
By building out expensive fulfillment centers and improving the lines products must flow down to reach the consumer, Bezos is further distancing his company from the rest of the pack. If competitors wanted to enter this space, they would have to spend an inestimable fortune to catch up to Amazon. Bricks-and-mortar giants such as Wal-Mart (NYSE: WMT ) have entered the fray, but they are still playing second fiddle when it comes to online sales.
A long horizon changes your view
I jumped at the chance to buy shares after the recent drop. I see things this way: Thirty years from now, when my now-nonexistent kids need to buy their dad a birthday gift, they'll most likely be hitting up Amazon.com to do so.
Let's be clear: It's painful for a company to spend so much money that it kills its earnings in the short term. On the other hand, by building out its infrastructure, delivering products in an even timelier manner, and increasing customer loyalty, Amazon is further cementing itself as the e-tailer of choice.
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