Bloomberg News

Amazon Profit Plunges After New Products Weigh on Expenses

October 25, 2011

(Updates with shipping expenses in 10th paragraph.)

Oct. 25 (Bloomberg) -- Amazon.com Inc., the world’s largest Internet retailer, reported a plunge in third-quarter profit after it ramped up spending on new products such as the Kindle Fire tablet. The shares tumbled 19 percent in late trading.

Net income fell 73 percent to $63 million, or 14 cents a share, from $231 million, or 51 cents, a year earlier, the Seattle-based company said today in a statement. That missed the 24 cents predicted by analysts, according to Bloomberg data. Amazon also said it may post an operating loss this quarter.

The company is sacrificing profit margins in search of sales volume and market-share gains. Amazon will sell 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 revenue from digital music, books and movies to make up for selling the product at a loss -- estimated by IHS Inc. to be about $10 per device.

“They missed investors’ expectations,” said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco. The companies’ growth plans aren’t doing enough to spur profit, rather than just sales, he said. “If they don’t show a corresponding increase in earnings, investors start to scratch their heads.”

Shares Drop

The online retailer’s stock had gained 26 percent in 2011 and set a record of $246.71 this month, raising pressure on Amazon to deliver results. The shares plummeted to as low as $184.59 in late trading, following a decline of 4.4 percent at the close today in New York.

Bezos, Amazon’s founder and largest shareholder, saw his stake lose as much as $4.67 billion in value today -- including both regular and extended trading. He reported holding 88.1 million shares as of Aug. 18.

The company said fourth-quarter operating results may range from a loss of $200 million to a profit of $250 million. Analysts were projecting a gain of $512.7 million. Sales will be $16.5 billion to $18.7 billion, the company said.

Amazon’s doesn’t deserve a valuation that puts it ahead of Apple, said Colin Gillis, an analyst at BGC Partners LP. The company trades at 119.5 times earnings, compared with Apple’s 14.4 times, according to data compiled by Bloomberg.

“Ultimately, does this deserve an ultra-premium valuation? No,” said Gillis, who rates the stock a “sell.”

Shipping Costs

The company also is suffering from soaring shipping expenses, he said. One reason: a rise in customers using Amazon’s Prime program, which offers unlimited two-day shipping for $79 a year. The company’s shipping fees generated $360 million in the third quarter, dwarfed by $918 million in shipping expenses.

Amazon added 17 new fulfillment centers this year, and that new overhead has weighed on margins, Chief Financial Officer Tom Szkutak said today in a conference call. It’s also building out the infrastructure for its Web services offerings.

“We’ve added a lot of capacity to support those growth rates,” Szkutak said.

Even as profit shrinks, revenue is benefiting from surging Kindle orders, propelled by customers ditching paper books in favor of electronic versions. Net sales climbed 44 percent last quarter to $10.9 billion, in line with estimates.

New Kindles

The company upgraded its Kindle e-readers and introduced the Kindle Fire tablet to more directly challenge Apple -- something Hewlett-Packard Co. and Research In Motion Ltd. have struggled to do. The Fire tablet, due next month, has a 7-inch display, smaller than the iPad’s 9.7-inch screen. It will run on Google Inc.’s Android software and offer Wi-Fi connectivity.

The Kindle Fire’s $199 price will help Amazon sell 4.5 million of them in the fourth quarter, estimates Anthony DiClemente, an analyst at Barclays Plc.

Amazon is pricing its devices to spur sales, and “they don’t care that the operating margin is 1 percent or 2 percent,” said Kerry Rice, an analyst at Needham & Co. in San Francisco.

The company also is at risk from the drop in sales of traditional media, even as it benefits from the shift to digital, Gillis said.

“Amazon is neither the fastest growing, or most profitable, company in our coverage and given the disruption occurring in physical books, music and movies, it is hard to justify the premium valuation,” he said.

--Editors: Nick Turner, Jillian Ward

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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