Amazon's projected cost of growth hits shares hard
Amazon.com forecast lower margins than some investors hoped for, reflecting the costs of its growth strategy, and shares of the world's largest online retailer plunged 8.5%.
January 28, 2011 / 16:30 IST
Amazon.com forecast lower margins than some investors hoped for, reflecting the costs of its growth strategy, and shares of the world's largest online retailer plunged 8.5%.
The company, which was widely believed to have enjoyed a stellar holiday season as it took market share from competitors, also posted fourth-quarter revenue on Thursday that fell just shy of analysts' estimates.To the chagrin of many short-term shareholders, Amazon has always focused on long-term growth and has never been shy about investing -- crimping profit margin to drive future revenue growth.Last year's spending on 13 new distribution centers and new acquisitions, from Diapers.com to Quidsi.com, is still hurting profit.Based on Amazon's projections, the company's operating profit margin for the first quarter could range between 2.8% and 3.8% -- well below the 5.5% operating margin since in the first quarter of 2010."Operating income (guidance) for the first quarter is well below the consensus and the stock is taking a big hit," said Tim Ghriskey, chief investment officer of Solaris Asset Management. "It could be that they're back to the spending mode."Chief Financial Officer Tom Szkutak noted the "very significant growth" over the past year that was reflected in the company's profit outlook.Szkutak declined to comment on just how much investment in infrastructure, talent and other costs the company planned to make in 2011."The big question for 2011 is what the growth would look like," he said. "Stay tuned," he said, for "how much capacity we'll have to add to support the strong growth for the year. We'll have to see what that looks like."Spend to growAmazon expects first-quarter operating profit between USD 260 million and USD 385 million, including USD 140 million for stock-based compensation and asset amortization.Excluding amortization, the forecast is USD 400 million to USD 525 million. Evercore's Sena said analysts expected USD 580 million.It expects revenue between USD 9.1 billion and USD 9.9 billion for the first quarter. Wall Street expects revenue of USD 9.31 billion, according to Thomson Reuters I/B/E/S.The company's fourth-quarter revenue of USD 12.95 billion fell just short of the average estimate of USD 13.01 billion. Some bullish analysts expected Amazon to blow past those numbers.The company drove growth through discounting in the holiday quarter, which pressured margins.Operating profit margin for the fourth quarter was 3.7% versus 5.0% a year earlier, a sign of how much Amazon -- and other retailers -- had to discount to attract customers during the holidays, analysts said."Topline still seems to be really strong, but to meet this demand they're having to invest in fulfillment and distribution and that's taking a little bit of a short-term margin toll," analyst Ken Sena at Evercore Partners said.Net income in the fourth quarter was USD 416 million, or 91 cents per share -- up from USD 384 million, or 85 cents per share, a year earlier. Analysts on average forecast 88 cents a share, according to Thomson Reuters I/B/E/S.Amazon shares traded at USD 168.75, down 8.5%, following the earnings report, after rising more than 5 percent to end at USD 184.45 on Nasdaq Thursday. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
