Is Something Wrong With Amazon.com?

There's been a theme going around lately when it comes to Amazon.com's (Nasdaq: AMZN  ) quarterly earnings releases, and it's that right now the bottom line is taking a back seat to top-line revenue gains and investing in future growth.

Despite this recurring notion, investors are still dumping the stock today from the knee-jerk reaction that net income plunged far more than what analysts were expecting, with the stock down almost 13% at the end of the trading day.

The cold, hard numbers
Top-line revenue in the third quarter soared by 44% from $7.6 billion to $10.9 billion year over year. Total operating expenses likewise skyrocketed 48% to $10.8 billion, which made operating income shrink by 70% to $79 million. Net income fell 73% to $63 million, or $0.14 per share. The Street was hoping for a little more in sales and way more in profits -- $0.24 per share, to be precise.

Going forward, Amazon even projected the possibility of an operating loss next quarter, with a pretty wide range of what to expect because of difficulty in predicting seasonality. The company may generate an operating loss of $200 million, or income of $250 million. Meanwhile, revenue is forecasted to keep chugging higher to an altitude of $16.5 billion to $18.7 billion, representing between 27% and 44% year-over-year growth.

Hey, big spender
Costs related to the Kindle Fire and technology infrastructure are the culprits in the drop in profits. During the conference call, Amazon CFO Thomas Szkutak said the jump in capital expenditures, which totaled $529 million during the quarter, were for "additional investments in support of continued business growth, including investments in technology infrastructure, including Amazon Web services and capacity to support our fulfillment operations."

Amazon has been aggressively growing its video-streaming offering -- which now boasts more than 12,000 movies and TV shows -- for Prime members, keeping Netflix (Nasdaq: NFLX  ) on its red toes, while the Kindle Fire is estimated to cost Amazon more than its $199 retail price tag, in contrast to the healthy margins Apple (Nasdaq: AAPL  ) enjoys on the iPad.

"Millions more"
Amazon CEO Jeff Bezos described Sept. 28, when the device was unveiled, as the "biggest order day ever for Kindle," topping previous holiday peak days. Bezos also said in the first three weeks, orders for the new family doubled the previous launch, and Kindle Fire pre-order activity is prompting the company to build "millions more than we'd already planned." No wonder Szkutak expects a record quarter in devices sales.

Key phrase: millions more. Research In Motion (Nasdaq: RIMM  ) hasn't even shipped a single million PlayBooks in more than two quarters, and Amazon is upping production by the millions before the Kindle Fire has even reached its first consumer. While each one of those Kindle Fires will undoubtedly generate additional upfront losses, each unit also represents the fact that Amazon is on track to corner the Google (Nasdaq: GOOG  ) Android tablet market while also being a portal to buyers' wallets when they inevitably come back for content and apps.

Proactively punished
As a shareholder, I'm not remotely concerned. Right now, Amazon is being punished for spending money to make money, which is a time-tested business reality -- just like the razor-blade model being used with the Kindle Fire. The company is proactively seeking new areas of growth, instead of becoming complacent in its existing areas of leadership. There's nothing wrong with that. What's so surprising is that investors are still so skittish, while Amazon has been upfront about its strategy for multiple quarters.

All growing startups go through a phase of unprofitability during the quest for black ink. Although Amazon obviously doesn't qualify as a start-up in any way, the underlying cause of the symptom is the same: Amazon is investing in the future. I see it as the onset of a whole new era of growth for the company.

Trouncing traditional retailers like Best Buy (NYSE: BBY  ) and Barnes & Nobles (NYSE: BKS  ) gets old after a while. If the next 10 years can be anything like the last 10 years for Amazon, then I plan on getting comfortable and seeing you at the finish line.

Taking some short-term pain for long-term gain is simply the name of the game.

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Fool contributor Evan Niu owns shares of Amazon.com and Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, Google, and Netflix and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (5)

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 October 26, 2011, at 11:08 PM, Dlee88 wrote:

    You hit it right on Evan! I was saying the same thing, they're doing business like it is suppose too.

  • Report this Comment On October 27, 2011, at 12:44 AM, DangerousDave8 wrote:

    Their stock price is sitting on some nice support on the 50 Week Moving Average... if it breaks through in the next few weeks, then that would be bad... if not, then we will see what happens - kinda depends on the global economy. Anyway, technically AMZN trades well this time of year (Mean Returns Chart for AMZN - http://www.tradingclearly.com/symbols/AMZN/means/)

  • Report this Comment On October 27, 2011, at 2:02 AM, lovesaves wrote:

    Sorry Evan, I have to disagree. Amazon's only value resides in the fact that they attract hundreds of millions of eyeballs. Therefore they might be a worthwhile acquisition for a company that sells a profitable product. As a retailer with razor thin margins and trading at a P/E of over 70, Amazon is a busted business. Their P/E needs to be nearer to 10 and that can only happen if their margins increase substantially or their share price collapses.

  • Report this Comment On October 27, 2011, at 6:56 AM, kariku wrote:

    Yes, there is something wrong: the stock price

  • Report this Comment On October 27, 2011, at 8:26 AM, megoogler wrote:

    Short, short Amazon!  Loosing $50 on each of millions of kindle Fire will really kick in in 4th quarter and 1st quarter of 2012.  Add losses on each Prime member for free 2-day shipping and free movies streaming and free cloud storage.  Add more states demanding taxes. Amazon is finished...

  • Report this Comment On October 27, 2011, at 1:53 PM, psikic wrote:

    @megoogler: No one knows how much the Fire really costs to build, $50 loss is the highest estimate. They might even turn up to a $50 profit. There is no guaranteed loss for each Prime member either -- remember, Prime is $79 a year. Free cloud storage doesn't cost as much to provide as you might think -- Amazon only stores duplicate content once. (i.e., there is only one copy of your favorite Justin Bieber album in their cloud, when someone else uploads it they will just link to the same copy)

    Amazon isn't finished, this is only the beginning of their rise.

  • Report this Comment On October 27, 2011, at 4:23 PM, BMFPitt wrote:

    I was very close to buying this when it went under $50 and have been kicking myself ever since. Been waiting for a big pullback and this might be it. Or I may wait til next quarter to save a few bucks to see if they take a loss and there's a nice panic sell to jump in on.

  • Report this Comment On October 27, 2011, at 6:00 PM, memoandstitch wrote:

    The worry is that the pricing seems to suggest that Kindle Fire is inferior to iPad.

  • Report this Comment On October 28, 2011, at 3:59 AM, kthup wrote:

    "Costs related to the Kindle Fire and technology infrastructure are the culprits in the drop in profits...as a shareholder, I'm not remotely concerned. Amazon is being punished for spending money to make money, a time-tested business reality."

    The hypocritical double-standards on this site are sickening. For Amazon, it's brilliant strategy, but for BKS, the same strategy is a death knell. What a bunch of self-serving idiots this bunch of fools is.

  • Report this Comment On October 28, 2011, at 10:25 AM, pondee619 wrote:

    " favorite Justin Bieber album" = oxymoron

  • Report this Comment On October 28, 2011, at 11:05 AM, shortvehicle wrote:

    Hay didn't they just say that the internet was taking all the trade from the high street???

    So if it ain't there...where is all the trade?

    Who has all the money?

    Banks?

    Government?

    Oil companies?

    Other energy companies?

    The EU?

    China?

    America?

    or a combination of all these? If we don't cure unemployment, soon NONE of the thieving rogues listed above will get anything...

    Then where will we be?

    Oh yes I remember now...Switzerland...

    At least we can ski....

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