Don’t Panic, Amazon Will be Just Fine

By Amanda Alix - February 1, 2012 | Tickers: AMZN, BKS | 0 Comments

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As fourth-quarter earnings go, it wasn’t really a bad report.  Amazon (NASDAQ: AMZN), the internet titan among retailers, reported an increase in revenue from a year ago of nearly 35%, or $17.43 billion, a bit shy of the $18.3 billion analysts had proffered.  Its net income was $177 million, or $.38 per share, whereas it was more like $416 million the previous year quarter.  Well, that’s quite a drop, to be sure.  But, wait: analysts only predicted $.16-$.17 per share, so Amazon beat the Street by more than 50%.  Well, no matter.  The stock tanked in after-hours trading, anyway.

 Why did this happen?  Well, most pundits would tell you that Amazon’s profits dropped 58% year over year; that it is spending too much too fast; that it is expanding without the least bit of concern over its margins.  Well, they’re not entirely wrong, but they are also not telling the whole story.  Here’s why Amazon is going to be all right:

1.  Amazon is losing money on Kindle and Kindle Fire, but it’s all part of the plan.  Amazon sells e-books to owners of its Kindle reader, just as Barnes & Noble (NYSE: BKS) sells its own e-books, and no others, to customers who purchase their Nook e-reader.  Amazon sets the price of these products, currently at $9.99.  By discounting the Kindle and selling it through other venues such as Wal-mart, it is gathering a crowd of e-reader customers who are hooked on their products — literally.  As far as the Kindle Fire goes, the scuttlebutt is that the unit is optimized for shopping on Amazon.com, but not very responsive to other vendors’ sites.  Sneaky?  Yes.  Savvy?  You bet.
   
   
2.  Amazon is expanding fast and has included issues related to that fact in its forecasts.  Amazon had offered revenue projections between $16.45 billion and $18.65 billion, noting that its varied projects, investments and losses from the Kindle Fire promotion might squeeze profits.  Peering at the numbers in this light, their revenue came in right smack in the middle of their own predictions, which is actually pretty good.  The market, however, chose to hang with the higher end of the spectrum, which didn’t pan out.  Well, heck.
   
   
3.   Wall Street knew about all of the above hence the low $.17 per share earnings number.  They were also well aware that revenue was not going to be anywhere near where it was a year ago.  Now, of course, they are bleating about the fact that revenue growth wasn’t up to their expectations, but, dang, they have to complain about something. 

 Amazon has cautioned that their Q1 numbers will also reflect growing pains, possibly dragging down revenue numbers a bit -- but not much -- below street estimates.  They also warned of a possible loss, as well.  Or, a possible profit.  As always, time will tell.

 Investors knocked the stock down 11% in after-hours trading, so here’s my advice:  go buy some Amazon stock — quickly -- because in a year from now you’ll be glad you did.  Then, relax and curl up with a nice e-book reader.  Just make sure it’s a Kindle.

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