Is This Tech Giant Aiming to Lose Money?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The head of a company valued at over $120 billion would like to remind investors that the business does have a profit motive, after all.  (NASDAQ: AMZN  ) CEO Jeff Bezos spent most of this year's letter to shareholders (link opens PDF file) defending the company's spiking levels of spending, and making the case that the e-tailer really does aim to generate long-term profits.

Here's a quick rundown of some of the huge new investments that have critics worried, and Bezos' response to the complaints.

Digital media splurge
Amazon is on a content shopping spree. In fierce competition against Netflix (NASDAQ: NFLX  ) over the growing streaming video market, the company has quickly tripled the size of its TV and movie library to more than 38,000 titles.

Netflix spends over $2 billion annually on securing content rights, and that appears to be the same commitment that Amazon is headed toward. Bezos sees the costs as all part of improving the customer experience. He quotes a happy Prime customer who said, "I signed up for Prime for the shipping, yet now I get movies, and TV and books. You keep adding more, but not charging more. So thanks again for the additions."

Tiny tablet margins
The tablet boom might be padding some device manufacturers' bottom lines, but not Amazon's. Apple's (NASDAQ: AAPL  ) margins have been falling as sales of the iPad Mini ramp up. Still, the Mac maker logged a hefty 38.6% gross profit last quarter. Amazon, meanwhile, prefers to "sell premium hardware at roughly breakeven prices," according to Bezos. That approach puts the pressure on content sales to deliver all the profits for the company's Kindle e-readers and Fire tablet lineups.

Services price cuts
Amazon's cloud services division, or AWS, looks like it's in the business of cutting prices. Since launching in 2007, AWS has sliced the prices it charges enterprises a whopping 27 times. And the company also added a feature that alerts customers to the fact that their configurations may be unnecessarily expensive. "Yes, we are actively telling customers they're paying us more than they need to," Bezos said.

Summing it up
The CEO sums up critics' complaints like this: "Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company."

And in response, he quoted Benjamin Graham's famous saying about long-term stock gains boiling down to a company's earnings power: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

"We want to be weighed," Bezos says, "and we're always working to build a heavier company."

Looking ahead
That heft hasn't shown up in the company's operating margin lately. Operating profits have tanked as spending ramped up. 

AMZN Operating Margin TTM Chart

AMZN Operating Margin TTM data by YCharts.

But when Amazon reports its first-quarter earnings on April 25, investors will get a crucial update on those profits, as well as a fresh chance to vote on the company's business trends.

More on Amazon from The Motley Fool
Our premium report will tell you what's driving the company's growth, and fill you in on reasons to buy and reasons to sell Amazon. The report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.

Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2362327, ~/Articles/ArticleHandler.aspx, 9/28/2016 3:19:03 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,322.36 94.06 0.52%
S&P 500 2,167.62 7.69 0.36%
NASD 5,313.19 7.48 0.14%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 3:03 PM
AMZN $829.99 Up +13.88 +1.70% CAPS Rating: ****
AAPL $114.03 Up +0.94 +0.83%
Apple CAPS Rating: ****
NFLX $97.31 Up +0.24 +0.25%
Netflix CAPS Rating: ***