LOS ANGELES (Reuters) - Internet retailer Amazon.com (AMZN) left Wall Street puzzling over its strategy and wondering if its long-term investments would pay off.
Investors punished Amazon's stock on Friday, sending shares down more than 10 percent after disappointing earnings, and some on Wall Street said they craved more information than what Amazon has released.
The morning after the Internet retailer said fourth quarter profit fell 43 percent, analysts lowered estimates and price targets and published their concerns over the short-term outlook for the Seattle-based retailer, the second-most popular Web commerce site behind No. 1 eBay Inc.
While posting a sales increase of 17 percent, Amazon's results showed shrinking operating profit margins, increased costs and revenue deceleration. In the year-ago period, for example, sales jumped 31 percent over 2004.
Analysts cited frustration with the apparent lack of payoff from Amazon's continued investment in research and development. Investment in technology and content grew 57 percent in the quarter, and the company said investment would continue, though at a slower rate, throughout 2006.
Operating expenses rose 31 percent and shipping costs, exacerbated by discount shipping program Amazon Prime, rose 17 percent. "The apparent lack of operating leverage remains the single biggest issue for Amazon." wrote Citigroup analyst Mark Mahaney in a note to investors, sounding a common theme. Mahaney, who has a "sell" rating on the stock, lowered his 2006 earnings estimates to 60 cents from 78 cents and price target to $34 from $38.
Although some investment banks and brokerages, including Deutsche Bank, Credit Suisse and Stifel Nicolaus, defended Amazon on a long-term basis, some complained that Amazon has not clearly identified its path to stronger profits. Some labeled Amazon high-risk, suggesting investors look to eBay instead among Internet stocks.
Safa Rashtchy of Piper Jaffray said Amazon's tight-lipped policy regarding research and development investment "prevents investors from understanding if these levels of spending are appropriate or where exactly the investments are going."
Amazon spokeswoman Patricia Smith said the company "cannot always disclose at the level people would like to see," and pointed to comments on Thursday by founder and Chief Executive Jeff Bezos. Bezos discussed short-term, intermediate and longer-term investments, with digital and search engine A9.com among the latter. He also said Amazon Prime posted "positive signs."
Amazon has not confirmed rumors of deals with independent Hollywood studios for digital content, instead telling analysts to "stay tuned." Goldman, Sachs analyst Anthony Noto wrote he was "concerned that the shift toward digital consumption of music and home video will negatively impact Amazon unless it rolls out a more comprehensive digital media product in the near term." Still, he said, Amazon faces stiff competition in that lower-margin area, with profitability not necessarily guaranteed.
But Scott Devitt at Stifel Nicolaus, who has a "hold" rating on the stock, sounded a more bullish viewpoint, writing that "the market generally misunderstands Amazon's business." Devitt suggested that the Street is hypocritical in labeling the Internet retailer "the black box" while ignoring Google Inc's reticence. But he agreed that Amazon could be more transparent in its strategies, and if it were, the business would be "priced more appropriately."
He said he believed investments would pay off long-term, adding "Sometimes it's the companies that are the most expensive to build that have the highest long-term value."
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