Amazon.com Is More of a Leader Than a Loss Leader

Amazon.com (Nasdsaq: AMZN) investors fearing the worst can exhale. The leading online retailer is growing faster than analysts were expecting, and margins aren't contracting as badly as the pros had feared.

Net sales soared 34% to $13.2 billion in the first quarter, with North American sales growing even faster. Profitability declined 35% to $0.28 a share -- and trailing free cash has retreated 39% over the past year to less than $1.2 billion -- but this is the price that Amazon has to pay if it wants to arm the world with Kindles that invite consumers into its promising digital ecosystem.

Analysts figured Amazon would muster a profit of only $0.07 a share on $12.9 billion in net sales, so it's easy to see why the stock is soaring on a fourfold beat on the bottom line.

Amazon is pounding the table when it comes to the exclusivity of its ecosystem. The e-tailer points out that 130,000 in-copyright books -- including 16 of its 100 best-sellers during the quarter -- are exclusive Kindle Store titles.

This is clearly a salvo to those wooed by Barnes & Noble's (NYSE: BKS  ) Nook, especially the new illuminated GlowLight model that's turning heads -- and turning off table lamps. It's also a warning shot to Apple (Nasdaq: AAPL  ) and traditional publishers that are under fire for potential price fixing. Amazon isn't just making more money than the market was expecting. It's disrupting the publishing world with its seamless self-publishing model.

The only disappointment in Amazon's report is its guidance for the current quarter. The dot-com darling expects net sales to grow 20% to 34% in the second quarter, so top-line growth will decelerate unless it nails the high end of its range. Analysts were perched on the higher end of that range, with a forecast calling for net sales to climb nearly 30% during the period.

This is still an impressive growth rate for a company of Amazon's girth. Overstock.com (Nasdaq: OSTK  ) saw its revenue actually decline slightly during the same three months. When high-end jeweler Blue Nile (Nasdaq: NILE  ) reports in two weeks, Wall Street's settling for a meager 3% increase in net sales.

Value hounds may be scratching their dog ears at Amazon's lofty valuation, but there's a bigger picture here that just seems to be clicking for the company.

Gnaw something
Nine out of 10 of Amazon's best-selling items during the quarter were digital products. Clearly, the next trillion-dollar revolution will be in mobile, and Amazon isn't the only likely winner. A free special report will get you up to speed.

The Motley Fool owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, and Blue Nile, creating a bull call spread position in Apple, writing puts on Barnes & Noble, and creating a call spread/risk reversal on Blue Nile. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz owns a first-generation Kindle and a Kindle Fire, but he owns no shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On April 26, 2012, at 10:00 PM, accelerando wrote:

    The greatest thing from the report was this: Amzn sells kindles mostly at a loss. But wait. They make it up by using the kindle's to sell digital books. But wait. Most of the books are not sold! Isn't this simply so neat! You can borrow the books for free. Amzn will pay the author's a royalty each time you borrow. So let me get this straight. Loss leader kindle. To allow users to borrow books. For free. And amzn pays the authors.

    Assuming that .28/share continues for the whole year. Assuming amzn stock is over 200 -- that would mean amzn is selling for 200x forward earnings. This is the greatest stock scam/ponzi scheme of all time. And all you fools hope there is a greater fool to buy your stock at an even higher price in a company that cannot make enough money to justify a price 1/10th it's current price.

    And Jeff Bezos just gets richer and richer.

    There oughta be a law.....

  • Report this Comment On April 26, 2012, at 10:24 PM, TMFBreakerRick wrote:

    accelerando, be careful with any assumption that takes a retailer's first quarter and stretches it out over four periods. Amazon earned a lot more than that in Q4, and that was after selling millions of Kindles at or possibly below cost.

    And the Kindle Owners Library free monthly rentals are for those paying $79 a year for Prime. Since they're not having books shipped for free anymore, it's a nice way to keep Prime customers around.

    You do have a point about the stock's valuation being potentially problematic, but I just wanted to share some perspective on those two points.

  • Report this Comment On April 27, 2012, at 7:53 AM, great08 wrote:

    That is what I had in mind too TMFBreakerRick. That $79 a year... times the number of kindles sold... times whatever the number of years the average kindle user will keep Prime... equals a pretty penny. It gives the ability for Amazon to expand it's customer base and possibly create a following if future customers. They will loose a little profit by offering a lending library... and free videos... and free 2 day shipping on any items purchased... and unlimited clouds storage... etc. to it's prime members. However, I am now officially a member of Amazon prime and enjoying it. Whenever I need to buy a large item I look to Amazon first. I did not do this before owning a kindle fire and seeing what kind of an asset Amazon can be. I do hate their P/E ratio right now. However, in the extreme long term... I know that 40 years from now I will be able to look back and think of the current price as cheap... provided that they don't mess up and crash and burn.

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