Amazon Shares Tumble on Profit Concerns
Thursday February 3, 11:12 AM EST
CHICAGO (Reuters) - Shares of Amazon.com (AMZN) fell more than 16 percent on Thursday after the online retailer reported earnings that fell short of analysts estimates and raised concerns the company was focusing more on sales than profits. "In our view, Amazon continues to cut prices in an effort to spur incremental sales, but to the detriment of profits," Prudential analyst Mark Rowen wrote in a research note. He has an "underweight" rating on the stock.
Amazon on Wednesday posted earnings of 82 cents a share. While net income rose more than four times year ago earnings, earnings excluding one-time items were 35 cents a share, 5 cents below the average analyst estimate. Incentives like free shipping and discounts cut into margins. Analysts also raised concerns that as electronics make up more of Amazon's sales, margins will be further squeezed.
Amazon shares were down $6.90, or more than 16 percent, to $34.98 on Thursday morning on Nasdaq. Earlier, they traded as low as $34.53.
Amazon Caught in Crossfire
By Kevin Kelleher
TheStreet.com Senior Writer
2/3/2005 1:10 PM EST
Click here for more stories by Kevin Kelleher
The rule of thumb in the tech industry is this: Get the top line growing faster, even if it means bottom-line growth slows down.
There's only one problem. It clashes with a Wall Street rule that says: We can live with slower revenue growth if it comes with healthy net income growth. But surging revenue and sluggish profits won't be accepted. Large, mature tech giants such as IBM (IBM:NYSE - news - research) and Microsoft (MSFT:Nasdaq - news - research) have turned the trick of satisfying analysts' expectations into a graceful art.
Amazon.com (AMZN:Nasdaq - news - research), that problem child, has not.
And therein lies the rub -- and the reason for all the volatility in stocks such as eBay (EBAY:Nasdaq - news - research) and Amazon. But Amazon and eBay aren't IBM and Microsoft -- they're younger, and they exist in markets that are still yet to mature. They are pushing for revenue growth, and Wall Street doesn't like it. In Thursday trading, Amazon's stock was at $34.93, down $6.95, or 16.6%.
Amazon isn't alone in being caught between two immutable forces. The analysts covering it seem stuck between the need to address the selloff that followed Amazon's fourth-quarter report and the need for Amazon to invest in new projects at the cost of lower margins.
Lanny Baker at Smith Barney has a hold/high-risk rating on Amazon and called its margins "unpredictable" but seemed sympathetic to the notion that Amazon's actions today could help future margins. "Intriguingly, we believe that many of the factors that are causing Amazon to disappoint on higher profitability expectations today could in time turn around and amplify revenue growth and sweeten the company's long-term margins," Baker wrote. The shipping membership offer could help stimulate user frequency and lead Amazon to a higher share of its core customers' online spending." (Smith Barney has no underwriting relationship with Amazon.)
Terry Heath at CS First Boston, which has an underwriting relationship with Amazon, took a sterner tone, lowering Amazon's rating to neutral from outperform. "While Amazon's strategy of lowering costs to the customer in order to maximize volume through the network and free cash flow is clearly having it's intended impact, it is difficult to justify current valuation without substantial upside to company guidance," the report said.
Meanwhile, Deutsche Bank (which has no banking relationship with Amazon but intends to seek one in the next three months), maintained its buy rating for the stock, because "longer term, the business model and underlying metrics seem be moving in the right direction," analyst Jeetil Patel wrote in a Thursday note. But Patel couldn't help taking a jab at Amazon's numbers: "As has been the case with several quarters now, the company took the concept of reinvestment to extremes."
Amazon posted a pro forma profit of 93 cents a share in the fourth quarter of 2004, including a one-time deferred tax benefit of $244 million. Leaving the tax benefit out, Amazon's profit came to 35 cents a share, far below the analyst consensus of 40 cents. Revenue rose 31% to $2.54 billion in the quarter. Excluding an $85 million benefit from foreign-exchange rates, revenue gained 26% over last year.
Amazon altered its 2005 guidance to show revenue that is substantially higher than its previous guidance, and an operating profit that is slightly lower. In a Wednesday call, the company explained that most of the burden on margins is coming from adding to two strategies that have irked investors in the past: free shipping as a bid for customer loyalty, and higher spending in technology such as its new A9 search engine.
Amazon has executed pretty well in the past when turning its risky investments into growth, and the debate over whether it can do it again this time will play out through this year. For today, though, the roaring of the Amazon bears is making the most noise.
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