Why Amazon.com Is in the Penalty Box After Earnings

Amazon.com had a decent quarter for revenue growth but there are some problems that will likely plague the company for a number of quarters.

Apr 30, 2014 at 11:00AM

Amazon.com (NASDAQ:AMZN)  may have reached the tipping point of investor sentiment this quarter as expenses grew faster than revenue and the company guides to a loss in the coming quarter. Over the years, Amazon has been immune to valuation concerns because analysts believed the company could decide to turn a profit at any time by cutting back expenses.

Unfortunately that may no longer be the case as two critical financial metrics are becoming more of a concern for the market. Of course the real question is: What is to become of the stock over the next six months, one year, and beyond?

Profit guidance came in well below expectations
Amazon's revenue rose 22.8% from the prior year to $19.74 billion , nearly $300 million above the $19.42 billion consensus. But, earnings per share of $0.23 was a penny below estimates.

The company guided revenue in-line with consensus at $18.1 billion to $19.8 billion. Everything looks ok so far, but here's where things start to get scary. Operating income is now expected to be negative to the tune of $455 million to $550 million compared with expectations of a positive $189 million. Clearly, this is a major shift in profitability.

Media Growth Slows
Media is arguably the most important growth area for Amazon. The company has poured money into various Kindle devices over the years. It has become an amazingly cheap competitor to Netflix and started developing its own online video content -- but the growth appears to be slowing. In the quarter, the consolidated media segment grew at only 8.1 %. In the fourth quarter, consolidated media growth was 11%. While the difference between 11% and 8.1% may not seem like a lot, to the number crunchers, it represents a 26% drop, which can't be ignored.

Either of these two metrics could have been explained away, but the two of them together present a real problem. Combined these numbers indicate that Amazon's slowing growth could cause the company to invest its capital in new ventures that have no track record of profitability.

New businesses continue to soak up cash
Amazon has been busy this last quarter with the release of FireTv, , its attempts to fulfill its own deliveries rather than go through UPS , and its big expansion plans for its grocery service. The only problem is that every time one of these businesses is announced, it's another hit to profitability. If you add slowing growth to the mix, the company could be at a lull as expansion pressures profitability.

Now, before you start writing the barbed comments, realize that I am an Amazon Prime subscriber and I like the service. I'll also probably be a Fresh customer if it is offered in my area. The one thing you need to remember though is that a good company doesn't always make a good investment. In this case, there could be more downside coming.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


David Eller has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers