Amazon.com Inc. (AMZN:US) is stepping up spending on warehouses and Web-based services, boosting costs to a record level in a drive to sell more products during the holiday season.
The world’s largest online retailer reported yesterday that third-quarter revenue grew 24 percent to $17.1 billion, topping analysts’ average projection of $16.8 billion, according to estimates (AMZN:US) compiled by Bloomberg. That helped curtail net losses, which narrowed to $41 million from $274 million a year earlier. Investors cheered the results, pushing shares up 9.4 percent, the biggest gain in 18 months.
Chief Executive Officer Jeff Bezos is pouring money into the delivery network, cloud-computing services and line of Kindle e-readers and tablets, sacrificing near-term profits to fuel growth. That could put Amazon on track to outpace the e-commerce market in the last three months of the year, when online sales are seen climbing 15.5 percent to $83.2 billion, according to EMarketer Inc.
“There is no other company in the world that has such an awful history of profitability, but continues to be rewarded for it so handsomely,” said Sucharita Mulpuru, an analyst at Forrester Research in Cambridge, Massachusetts.
Amazon, based in Seattle, rose to $363.39 at the close in New York. Amazon is trading at about 138 times (AMZN:US) projected earnings for the year compared with a ratio of 19 for EBay Inc. (EBAY:US), according to data compiled by Bloomberg.
Fourth-quarter sales will be $23.5 billion to $26.5 billion, the company said. Analysts on average were projecting revenue of $25.9 billion.
While Amazon’s results may fuel investor optimism that its holiday quarter will outpace the industry, EBay gave a sales forecast for the period earlier this month that fell short of analysts’ forecasts.
Bezos, who founded Amazon in 1994, is spending cash to build warehouses closer to customers, a strategy meant to reduce shipping costs over time. Fulfillment expenses increased 35 percent to $2.03 billion, while technology and content expenses climbed 45 percent to $1.73 billion.
“The cons are that Amazon continues to be at best barely profitable and that shipping and freight continues to be an enormous cost for them, and that doesn’t really improve as they scale the business because picking, packing and shipping packages are variable expenses,” Mulpuru said.
Amazon is building fewer fulfillment centers with more square footage in each and consolidating its smaller warehouses, Chief Financial Officer Tom Szkutak said on a conference call yesterday. While Amazon had worked to open 19 warehouses ahead of the holiday season last year, this year the company is planning to open seven, Szkutak said.
The Web retailer reported a negative operating margin of 0.1 percent in the third quarter, compared with minus 0.2 percent a year earlier. In North America, the most mature market, the margin contracted to 2.9 percent from 3.7 percent.
Sales by third parties on the site, which bring in higher margins, made up 40 percent of items sold, compared with 41 percent in the third quarter of last year, Szkutak said. Amazon takes a commission that’s logged almost entirely as profit when consumers purchase from an outside seller, helping the Web retailer buffer margin contraction.
Amazon also unveiled its third generation of Kindle Fire tablets in September, seeking to set itself apart in an increasingly crowded market. While Apple Inc. makes money each time an iPad is sold, Amazon offers its devices at cost and aims to profit from sales of digital movies, books and music.
The online retailer said it added “millions” of Prime members in the last 90 days, though the company didn’t disclose the total number of subscribers. Prime buyers, who pay $79 a year for two-day shipping and access to video and other content, are some of Amazon’s most loyal customers, staying with the company longer than those who don’t subscribe, Szkutak said.
“They are growing revenues nicely,” said Michael Pachter, an analyst at Wedbush Securities in Los Angeles who rates the stock the equivalent of a hold. “They are going to get to a point where they can’t spend all of the profit.”
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