Another Internet Miss: Amazon's Outlook Disappoints (But Not for Long)

Posted by: Rob Hof on January 30, 2008

Looks like Amazon.com managed to overcome a tough holiday season to turn in a better-than-expected quarter. Fourth-quarter profits more than doubled, about as expected, to $207 million, or 48 cents a share, on a pretty amazing 42% jump in sales, to $5.67 billion. (Update below.)

The outlook for next year was customarily conservative: Amazon said it expects 2008 sales to rise between 26% and 33%, to between $18.75 billion to $19.75 and operating income to rise 20% to 50%, to between $785 million and $985 million. Sales estimates were better than analysts had expected, but apparently investors had hoped for a better profit margin outlook.

At first, the stock bounced around, a little up, a little down. It appeared to settle around 3% 7% 11% off the close of $74.21 a share. More color in the conference call this afternoon could change people’s minds one way or another. (Now, some analysts are saying Amazon’s fourth-quarter gross margins, as well as the outlook in 2008, are a little light, accounting for the investor concern.)

How did Amazon manage to do relatively well in a tough economy? CEO Jeff Bezos said it: “In our view, these unusual financial results are driven by one thing: continuously improving the customer experience.” Argue if you will whether Amazon is everything it should be, but it’s hard to argue with him on that point. By most accounts, Amazon literally delivered during the holidays.

One interesting tidbit in the earnings release: Amazon seems to be getting some traction for its Web services, such as its Elastic Compute Cloud, a computing-on-demand service, and its Simple Storage Service, a similar offering for on-demand storage. It said bandwidth used by these services in the fourth quarter was greater than the bandwidth used by all of Amazon’s worldwide sites combined.

On the earnings calls, CFO Tom Szkutak responds to a question whether operating margins will be 6% “forever” even though Amazon has said it can get to double-digit margins eventually. Szkutak says Amazon thinks it can still get there, but it’s focusing on maximizing free cash flow per share—which more than doubled in the fourth quarter.

Citi’s Mark Mahaney asks if there are any signs of consumer weakness. Apparently not. “Business is fine,” says Szkutak.

Update: Well, after a series of buy recommendations following Amazon’s after-hours slump, now the stock is up a bit so far today. Guess folks realized the outlook was OK after all. All the focus on small moves in profit margins is a little much, I think, because cash flow is ultimately what creates shareholder value.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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