There's been a theme going around lately when it comes to Amazon.com's (Nasdaq: AMZN) quarterly earnings releases, and it's that right now the bottom line is taking a back seat to top-line revenue gains and investing in future growth.
Despite this recurring notion, investors are still dumping the stock today from the knee-jerk reaction that net income plunged far more than what analysts were expecting, with the stock down almost 13% at the end of the trading day.
The cold, hard numbers
Top-line revenue in the third quarter soared by 44% from $7.6 billion to $10.9 billion year over year. Total operating expenses likewise skyrocketed 48% to $10.8 billion, which made operating income shrink by 70% to $79 million. Net income fell 73% to $63 million, or $0.14 per share. The Street was hoping for a little more in sales and way more in profits -- $0.24 per share, to be precise.
Going forward, Amazon even projected the possibility of an operating loss next quarter, with a pretty wide range of what to expect because of difficulty in predicting seasonality. The company may generate an operating loss of $200 million, or income of $250 million. Meanwhile, revenue is forecasted to keep chugging higher to an altitude of $16.5 billion to $18.7 billion, representing between 27% and 44% year-over-year growth.
Hey, big spender
Costs related to the Kindle Fire and technology infrastructure are the culprits in the drop in profits. During the conference call, Amazon CFO Thomas Szkutak said the jump in capital expenditures, which totaled $529 million during the quarter, were for "additional investments in support of continued business growth, including investments in technology infrastructure, including Amazon Web services and capacity to support our fulfillment operations."
Amazon has been aggressively growing its video-streaming offering -- which now boasts more than 12,000 movies and TV shows -- for Prime members, keeping Netflix (Nasdaq: NFLX) on its red toes, while the Kindle Fire is estimated to cost Amazon more than its $199 retail price tag, in contrast to the healthy margins Apple (Nasdaq: AAPL) enjoys on the iPad.
"Millions more"
Amazon CEO Jeff Bezos described Sept. 28, when the device was unveiled, as the "biggest order day ever for Kindle," topping previous holiday peak days. Bezos also said in the first three weeks, orders for the new family doubled the previous launch, and Kindle Fire pre-order activity is prompting the company to build "millions more than we'd already planned." No wonder Szkutak expects a record quarter in devices sales.
Key phrase: millions more. Research In Motion (Nasdaq: RIMM) hasn't even shipped a single million PlayBooks in more than two quarters, and Amazon is upping production by the millions before the Kindle Fire has even reached its first consumer. While each one of those Kindle Fires will undoubtedly generate additional upfront losses, each unit also represents the fact that Amazon is on track to corner the Google (Nasdaq: GOOG) Android tablet market while also being a portal to buyers' wallets when they inevitably come back for content and apps.
Proactively punished
As a shareholder, I'm not remotely concerned. Right now, Amazon is being punished for spending money to make money, which is a time-tested business reality -- just like the razor-blade model being used with the Kindle Fire. The company is proactively seeking new areas of growth, instead of becoming complacent in its existing areas of leadership. There's nothing wrong with that. What's so surprising is that investors are still so skittish, while Amazon has been upfront about its strategy for multiple quarters.
All growing startups go through a phase of unprofitability during the quest for black ink. Although Amazon obviously doesn't qualify as a start-up in any way, the underlying cause of the symptom is the same: Amazon is investing in the future. I see it as the onset of a whole new era of growth for the company.
Trouncing traditional retailers like Best Buy (NYSE: BBY) and Barnes & Nobles (NYSE: BKS) gets old after a while. If the next 10 years can be anything like the last 10 years for Amazon, then I plan on getting comfortable and seeing you at the finish line.
Taking some short-term pain for long-term gain is simply the name of the game.
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