By Danielle Kucera - Feb 1, 2012 5:10 AM GMT+0700
Amazon.com Inc. (AMZN), the world’s largest Internet retailer, missed analysts’ fourth-quarter revenue estimates and reported a 57 percent decline in profit, dragged down by shipping costs and the money-losing Kindle Fire.
Net income fell to $177 million, or 38 cents a share, from $416 million, or 91 cents, a year earlier, the Seattle-based company said today in a statement. Sales rose 35 percent to $17.4 billion, compared with an estimate of $18.3 billion.
Chief Executive Officer Jeff Bezos is squeezing profit margins in search of growth, looking to add customers by pushing free shipping and offering its Kindle devices at cut-rate prices. That has conditioned investors to expect strong sales increases, making the latest results disappointing, said Colin Gillis, an analyst at BGC Partners LP in New York.
“To miss on the top line, that’s what breaks the momentum,” said Gillis, who recommends selling Amazon stock. “The bull case just breaks down.”
Amazon shares fell as much as 11 percent in extended trading after closing at $194.44 in New York. The stock has gained 15 percent in the past 12 months.
First-quarter operating income may range from a loss of $200 million to a gain of $100 million, the company said. Analysts in a Bloomberg survey were projecting a profit of $268.1 million. Sales will be $12 billion to $13.4 billion, Amazon said, compared with an estimate at the top of that range.
Third-Party Revenue
More of Amazon’s revenue is coming from third-party sellers, which hawk their wares on its site. While those sales carry higher profit margins, they don’t bring in as much money as when Amazon sells an item directly.
“Whenever there’s a mix-shift toward third party, it helps margins, but it reduces revenue,” said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco. He has an “outperform” rating on Amazon’s stock.
The shift helped earnings top estimates last quarter, even with the sales shortfall. Analysts projected 16 cents a share.
“Trying to predict during a seasonal Q4 is challenging,” Tom Szkutak, Amazon’s chief financial officer, said on a conference call. “That third-party increase is great for customers, great for sellers and helped our bottom line.”
Amazon Prime
Amazon’s Prime program, which offers unlimited two-day shipping for $79 a year, boosted expenses over the holiday shopping season, said Jason Helfstein, an analyst at New York- based Oppenheimer & Co.
“With shipping, if you look at that net loss number as a percentage of revenue, it keeps going up,” he said. “They’re trying their best to offset that in other ways.”
The Prime program is designed to lock in customers and encourage them to do more shopping in the long run.
While that means money spent on shipping increases as a percentage of revenue -- to 8.4 percent of sales in the third quarter from 7.6 percent three years ago -- those subscribers may spend at least three times more than regular customers as they become habitual shoppers on Amazon’s site, said David Spitz, president of ChannelAdvisor, a Web-strategy consulting company in Morrisville, North Carolina.
“That ratio grows with the tenure of a subscriber, meaning that after a couple of years, a Prime subscriber may be spending six times or more,” Spitz said.
Kindle Fire
The approach is the same for the Kindle Fire tablet. At $199, the device is less than half the price of Apple Inc. (AAPL)’s cheapest iPad. The expectation is that consumers will spend the money they save on Amazon’s e-books and video content, Jordan Rohan, an analyst at Stifel Nicolaus & Co., said in a note yesterday. That eventually will more than make up for revenue lost selling the device, he said.
For now, Amazon’s media revenue isn’t growing as quickly as anticipated. U.S. media revenue climbed 8.1 percent last quarter, about half the 15 percent that Sebastian was predicting.
Investors had speculated that the company would get a bigger boost from a 15 percent gain in industrywide holiday e- commerce spending, which ComScore Inc. (SCOR) pegged at a record $37.2 billion.
“When you have revenue growth start to stall, then the valuation question marks start to rise,” Gillis said.
Amazon trades at 141.9 times earnings in the past 12 months, according to data compiled by Bloomberg. By comparison, Apple’s price-to-earnings ratio is 13.
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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