(Updates shares in fifth paragraph.)
Oct. 25 (Bloomberg) -- Amazon.com Inc. profit is projected to be down by half in the third quarter, after the world’s largest online retailer developed a new lineup of Kindle e- readers that will weigh on margins.
The Seattle-based company, which reports earnings today, may post net income of $115.8 million, a 50 percent drop from a year ago, based on the average analyst estimate compiled by Bloomberg. Earnings will be 24 cents a share, compared with 51 cents the year prior, the data show.
Amazon will face more pressure on profit heading into next year as it sells the Kindle Fire tablet at a loss and state governments urge the company to collect sales tax, said Kerry Rice, an analyst at Needham & Co. in San Francisco. Today’s results will have to be flawless to justify Amazon’s stock price, which hit an all-time high this month, he said.
“If everything isn’t better than expected, you’ll see a selloff,” Rice said in an interview.
Shares of Amazon reached $246.71 on Oct. 14 and have gained 32 percent this year before today. That compares with a drop of less than 1 percent for the Standard & Poor’s 500 Index. The stock fell 2.5 percent to $231.70 at 9:41 a.m. in New York.
Analysts estimate that revenue will increase 45 percent to $10.9 billion in the third quarter, according to data compiled by Bloomberg. The company’s focus on sales volume may come at the expense of profit, Rice said.
Margins may narrow as Amazon sells its Kindle Fire tablet for as low as $199, less than half the price of Apple Inc.’s cheapest iPad. Chief Executive Officer Jeff Bezos is counting on sales of music, books, movies and merchandise on the tablet to make up for a loss estimated by IHS Inc. of about $10 on each device.
Operating margins are estimated to decline to 1.33 percent from 3.54 percent, and gross margins are projected to fall to 23.1 percent from 23.5 percent, the data show.
“This is really a volume game for them,” Rice said. “They’ve had to continue to invest, which is good because that shows demand. But it does depress earnings at times.”
Amazon will begin turning over taxes on California transactions next September under a bill signed by Governor Jerry Brown last month. The company agreed to drop efforts to repeal a tax measure through a referendum drive that had cost it at least $5.25 million, according to data maintained by the state. Brown’s signature on the bill ended a stare-down with Amazon over a June law treating Internet retailers the same as brick-and-mortar stores, which collect a 7.25 percent levy.
Accounting for Taxes
Amazon has fought attempts by New York, Texas, Rhode Island and North Carolina to force it to collect sales taxes on purchases, saying the moves infringe on the federal government’s power to regulate commerce among states.
If the online retailer has to increase prices to account for state taxes, it may lower 2012 profit by 19 percent, Rice said. A 5 percent price increase from taxes could spur a decrease in profit to $3.30 a share next year from his estimated $4.08, he said. Most analysts’ estimates don’t account for the effect of collecting levies.
“Who is impacted more than Amazon by this?” said Brian Blair, an analyst at Wedge Partners Corp. in New York, referring to state efforts to collect taxes on e-commerce sites. “Nobody. It’s going to be a continued fight for the next few years, and the states may ultimately win.”
‘People Buy Less’
Online discount retailer Overstock.com Inc. reported a decline in revenue of about 20 percent in Indiana during a period when it had to collect sales tax in the state, said Chief Executive Officer Patrick Byrne.
“When you raise a price 8 percent, people buy less,” Byrne said in an interview.
Revenue growth from sales volume will outweigh the profit decrease in the long term, making any stock drop on depressed earnings a “great opportunity” for investors, said Rice, who has a “hold” rating on Amazon.
“If you have to add another 5 percent to pricing, that levels the playing field a little bit,” Rice said. “But far and away, as far as availability of product, it really is amazing how Amazon has become this one-stop shop for low prices and almost anything you want to buy.”
--With assistance from James Nash in Sacramento. Editors: Marcus Chan, Nick Turner
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