Amazon’s Sales Miss Estimates, Profit Drops as Costs Surge

By Danielle Kucera - Feb 1, 2012 3:40 PM GMT+0700
Enlarge image

Amazon CEO Jeff Bezos introduces new Amazon and Kindle products in New York on Sept. 28, 2011. Photographer: Emmanuel Dunand/AFP/Getty Images

Play Video

Jan. 31 (Bloomberg) -- Joe Brown, features editor at Gizmodo.com, and Chad Bartley, an analyst at Pacific Crest Securities Inc., talk about Amazon.com's fourth-quarter profit and outlook. They speak with Emily Chang on Bloomberg Television's "Bloomberg West." Cory Johnson also discusses Amazon's performance. (Source: Bloomberg)

Amazon.com Inc. (AMZN) fell as much as 7.3 percent in German trading after sales missed estimates, signaling that its investments in media services, Kindle devices and shipping promotions have been slow to pay off.

Fourth-quarter revenue was $17.4 billion, the Seattle-based company said yesterday in a statement, trailing the $18.3 billion estimated by analysts in a Bloomberg survey. Net income fell 57 percent to $177 million, or 38 cents a share, from $416 million, or 91 cents, a year earlier.

Amazon, the world’s largest Internet retailer, got less revenue from digital media than anticipated, especially in the video-game market. The company also is relying more on third- party sellers, which can bolster profit but generate less revenue than direct sales. Amazon has conditioned investors to expect stronger growth, 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.

Amazon fell as much as 10.64 euros in Frankfurt and was down 6.6 percent to the equivalent of $179.23 as of 9:36 a.m. The shares fell $21.80 to $172.64 in extended trading in the U.S. yesterday. The stock, up 15 percent in the past 12 months, had closed at $194.44 earlier in the day.

First-quarter operating income may range from a loss of $200 million to a gain of $100 million, the company said. Analysts 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.

Hard to Explain

Chief Executive Officer Jeff Bezos is squeezing margins in search of growth, looking to add customers by pushing free shipping and offering its Kindle devices at cut-rate prices. While investors were expecting profit to take a hit, the sales slowdown is harder to accept, said Brian Nowak, an analyst at Nomura Securities International Inc. in New York. The reasons outlined by the company don’t seem to fully account for the sluggishness, said Nowak, who rates Amazon shares “neutral.”

Amazon’s third-party sellers use the company’s site to hawk their products and then provide a commission. Unit sales by outside retailers increased 65 percent during the holiday quarter and now make up 36 percent of units sold, Bezos said in the statement. Total sales rose 35 percent.

“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.

Earnings Top Estimates

The shift helped earnings top estimates last quarter, even with the sales shortfall. Analysts projected 16 cents a share. Still, the operating margin tightened to 1.5 percent in the period, from 3.7 percent a year earlier.

“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’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 money-losing Kindle Fire tablet also has raised expenses. 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 this week. That eventually will more than make up for revenue lost selling the device, he said.

Video-Game Decline

For now, Amazon’s media sales aren’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. The decline in video-game sales hurt the unit’s results, Szkutak said.

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.

Shareholders may now be wondering if the stock has become too expensive, Gillis said. It trades at 141.9 times earnings over the past 12 months, according to data compiled by Bloomberg. By comparison, Apple’s price-to-earnings ratio is 13.

“When you have revenue growth start to stall, then the valuation question marks start to rise,” he said.

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