Amazon Crashes After Earnings: Buying Opportunity?

Amazon.com (NASDAQ: AMZN  )  stock was down more than 11% in late-day trading Friday after the company delivered a disappointing earnings report for the fourth quarter of 2013. However, the online retailer is still outgrowing competitors by a wide margin, be it e-commerce companies such as eBay (NASDAQ: EBAY  ) or brick-and mortar chains like Wal-Mart (NYSE: WMT  ) . Should investors capitalize on the opportunity to buy Amazon at a discounted price or is the worst yet to come for the company?

The numbers
Sales increased by 20% to $25.59 billion during the fourth quarter of 2013. Excluding the negative impact from foreign exchange fluctuations, net sales grew 22% versus the fourth quarter of 2012. The number was marginally below Wall Street analysts' expectations, but within the company's own guidance of $23.5 billion to $26.5 billion for the quarter.

Operating income increased 26% to $510 million in the quarter versus $405 million in fourth-quarter 2012. Earnings per share increased materially to $0.51 per diluted share, compared to $0.21 per diluted share in the same period of the previous year. Analysts on average had forecast a higher earnings-per-share figure of $0.66 for the quarter.

For the first quarter of 2014, Amazon expects revenue in the range of $18.2 billion to $19.9 billion, an annual growth rate of between 13% and 24% from the first quarter of 2013. Wall Street analysts are forecasting sales of $19.67 billion for the quarter, so the company's midpoint guidance is also below those projections.

Moving forward
Amazon said it was considering raising prices for its Amazon Prime service in the U.S. by between $20 and $40. The service provides unlimited free two-day shipping and other benefits for $79 per year. The price has remained the same since Amazon Prime was launched nine years ago, and factors such as rising fuel and transportation costs, as well as increased use by members, are having a negative impact on Amazon's profit margin.

Amazon says it has "tens of millions" of Prime members, and the service is a key competitive strength for the company as it consolidates customer loyalty and increases purchase amounts per order and per customer. Membership continues to grow at remarkably strong rates; Amazon said it even had to limit new Prime membership sign-ups during peak periods in December due to capacity constraints.

Considering demand strength, it looks like Amazon could have room for price increases without hurting growth too much. Higher membership fees could mean higher revenue without any material increases in costs, so that should have a big positive impact on profitability.

Industry context
The numbers came in below analysts' expectations, but Amazon continues to perform remarkably well for a business of its size. The retailer continues to gain market share versus different kinds of competitors, consolidating its competitive strengths and positioning itself for growth in the years ahead.

eBay reported a 13% increase in revenue to $4.5 billion for the fourth quarter of 2013. While PayPal delivered a big increase of 19% in sales for the period, eBay Marketplaces produced a much slower growth rate of 12% during the quarter. eBay is still delivering solid performance, but Amazon seems to be clearly outgrowing its main competitor in the e-commerce business. 

Brick-and-mortar retailers have faced an aggressively challenging environment lately, and recent news from industry bellwether Wal-Mart confirms that there is no turnaround in sight in the short term. Wal-Mart announced on Friday that earnings for the fourth quarter of fiscal 2014 will likely be at the low end, or slightly below, the company's previously issued guidance, and the same goes for comparable-store sales in the U.S.

It's important to keep in mind that the previous guidance was already quite uninspiring. The company expected flat comparable-store sales in Wal-Mart U.S. and an increase of only 2% in Sam's Club comparable-store sales excluding fuel, so things seem to be going from bad to worse for many traditional retailers lately.

Foolish takeaway
Amazon's sales and earnings came below analyst expectations, but the company is still delivering outstanding performance for a business of its size and doing considerably better than competitors such as eBay and Wal-Mart. Besides, price increases for its Amazon Prime membership could provide a considerable boost to profit margin in the future. Amazon is still an extraordinary growth company with outstanding potential; the lower the stock price goes, the higher the expected returns for long-term investors.

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Read/Post Comments (3) | Recommend This Article (3)

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 January 31, 2014, at 6:04 PM, MFMotleyStool wrote:

    You probably wouldn't be "foolish" enough to buy it with your own money but you think it's a good idea for other people.

    It's a greater fool stock so stop encouraging them to buy. Why? Because it always goes up? Their metrics have been getting worse quarter after quarter for the last 3-4 years.

    You never know when price discovery occurs because when it does it will be lucky to hold $200.

  • Report this Comment On February 01, 2014, at 8:13 AM, TMFacardenal wrote:

    Hi MFMotleyStool

    As you can see in the disclosure, I own shares of Amazon.

    It has been a very profitable investment for me, and I´m planning to hold it for the long term.

    Thanks for your comment.

    Andres

  • Report this Comment On February 01, 2014, at 8:32 AM, Liana wrote:

    Was any of you foolish enough to use the WFM store brand? It is cheaper.

    I confidently picked up the WFM's canned tuna and a large amount of bones and skin.

    WFM replaces many of the other brands by their store brand.

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8/22/2014 4:00 PM
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