What is Making Amazon's Share Price Rise?
Rita is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon (NASDAQ: AMZN) recently came out with its earnings release for the fiscal 2012 second quarter, and the performance was a mirror image of what most S&P 500 companies have – good bottom line growth while the top line shows slow growth. Though the top line surged 29% from the prior year period, the bottom line took a severe blow and resulted in a 96% fall to $7 million. On top of this, the company announced that it also expects a loss in the coming third quarter. These are huge negatives, and shouldn’t they be deal breakers? Yet, Amazon shares have picked up almost 6.4% since then. Let’s look into the reasons and find out what’s up with Amazon.
Why is this happening?
Investors have a tendency to go with what they know, and they like to bid up shares of companies they are familiar with. This perhaps is the case with Amazon too. It seems like investors are very much impressed with the 29% top line growth that Amazon displayed and are probably waiting for the earnings to come around. Actually, the year on year $184 million fall in net income was also pulled down by the $65 million of estimated losses related to the acquisition of Kiva Systems, apart from the rise in expenditures.
The company is facing quicker rises in expenses related to order fulfilment, distribution centers, content and technology than in revenue. Again, the bottom line could have been higher had Amazon not suffered the $272 million unfavorable impact of the forex rate changes from the year ago period, which pulled down the top line. Excluding this impact, Amazon’s top line would have increased by 32%. The bright side is, the company is spending in order to fuel its growth by improving its services and this automatically will lead to improved earnings in the future.
According to FactSet consensus data, the operating margin of the company is expected to improve, but slowly, to 1.8 cents for each dollar of revenue in 2012 and to 2.7 cents for each dollar of revenue in 2014. On top of this, analysts are expecting Amazon’s Web services and the third-party retail business, which are growing fast and have higher margins than Amazon’s core online store, will push the margins even higher. Today’s pain of high spending in developing the business model has very high chances of turning into tomorrow’s gain for Amazon as more and more shoppers choose the online platform to make purchases. Analysts have a lot of faith attached to the company as understood from their expectations of Amazon’s EPS as they expect it to be around $0.83 for this year, $2.47 in 2013 and $4.60 in 2014. Probably these are getting factored into the current price, thus pushing up the figure.
Competitive landscape
Amazon has done well in terms of competition in the tablet segment. Kindle products are among the top 10 selling products of the company, with the Kindle Fire being the best selling product among the millions that are available on Amazon. Amazon is selling the tablet at cost so that it can penetrate into the market space, and it intends to make money off the digital contents that the tablet owner’s purchase. If you look at the chart, Amazon stands at the 3rd position in terms of total tablet shipments and has command of over 5% of the market. Though this might get overshadowed by Apple (NASDAQ: AAPL) and Samsung, the fact that Amazon has gained this much in such a small time frame looks very promising. The consumers have accepted the device well. Now, the company is looking at launching a 10” tablet with five to six different versions of the device.
(Source: IDC Worldwide Quarterly Media Tablet Tracker, August 2, 2012)
The tablet market has grown by 66.2% from the year ago period and by 33.7% sequentially, and has plenty of room to grow further. With this position in the market, Amazon looks promising to shareholders.
The world’s largest online book retailer has been slowly widening its focus and now it’s as much a technology company as a retailer. On one hand Amazon is now in competition with biggies of the technology space, such as Apple, Google (NASDAQ: GOOG), and Samsung. On the other hand it still functions in the online retail space where it competes with discount retailing giant Wal-Mart (NYSE: WMT). Though things aren’t going to be easy for the company as it faces stiff peer pressure, Amazon is expected to excel in both segments. As Amazon continues to deliver a strong fight against Google’s Nexus 7, it also is putting up well against Google’s Cloud. Amazon’s Web Services are proving to be better than the Google’s laaS Cloud, according to many industry experts.
Things are looking bright in the online retail space also. The company is addressing its issues of failed package delivery by developing what it calls “Amazon Locker.” Here Amazon is adopting a practice which has been in use for several years by other online retailers such as Wal-Mart and Best Buy. These Amazon Locker machines will be installed in grocery, convenience and drug stores, which will accept the packages, and customers can pick them up at a convenient time. Ex-Asda chief Andy Bond feels Amazon’s shift in focus will pay off big time, helping the company surpass Wal-Mart by 2020.
Concluding thoughts
Good growth opportunities, good products driving growth and good growth environment – Amazon is experiencing it all. Though at the moment the returns aren’t looking that attractive, in time this stock is surely going to light up your portfolio. Amazon is expected to continue spending heavily on distribution centers, web services and on low-margin devices such as the Kindle, and this automatically suggests that the near future returns might also be influenced by these escalating expenses. However, these investments will benefit the company in the future. Based on its growth prospects and its ability to evolve and transform itself from just an online book seller to a technology company, I would say Amazon looks pretty attractive to me. Things are looking good for this retailer-turned-tablet-maker and I feel it will succeed in the long run, provided its employees stop stealing from it. So, Amazon just needs to keep that in check and the rest will all be fine.
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