There's a fire sale on margins at Amazon.com (Nasdaq: AMZN). Stock up while you can.
The leading online retailer posted a reasonable quarter last night. Net sales soared 41% to $6.57 billion and would have been slightly higher absent currency fluctuations. Net income climbed 45% to $0.45 a share.
The bottom line growing faster than the top line implies margin expansion -- not contraction -- but let's just say that analysts were expecting substantially more stretching here. Wall Street pretty much nailed Amazon's net sales figure but was holding out for a profit of $0.54 a share for the period.
This is an unusual place that Amazon finds itself. It has topped analyst profit targets in the nine previous quarters before coming well short of where the pros were parked this time.
It's only going to get worse.
Amazon is projecting net sales to grow 27%-40% for the current quarter. That's cool. At its midpoint, the leading online retailer is expecting operating profits to inch a mere 4% higher. That's not cool.
Naturally, investors will conclude that the culprit is Professor Kindle with the rope-a-dope in the e-library. Amazon, Barnes & Noble (NYSE: BKS), and Sony (NYSE: SNE) have all slashed prices dramatically on their e-book readers in recent weeks. Even the unlikely Borders (NYSE: BGP) crashed the party to get in on the markdown madness.
However, Amazon's strategy appears to favor the Kindle bookstore over the hardware. It has made its e-books platform-agnostic, freely transferrable from all of Apple's (Nasdaq: AAPL) iAppliances to all of three leading smartphone families. It has sold three times as many e-books during the first half of the year than it did during the same six months last year.
Amazon also turned heads Thursday in announcing two-year exclusivity on several classic titles. It's a slick move, but the industry will pay if others follow suit. The moment that availability fluctuates from e-reader to e-reader is the day that curling up to a paperback comes back in style.
It may seem like the last thing Amazon would want, but if margins continue to deteriorate as e-readers slalom down to zero and the industry gets commoditized, margins circa late 2009 may not be such a bad throwback look.
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