Investors decimated Apple last week when it appeared that the world’s mightiest profit machine might be slowing down just a tad. But they cheered on Tuesday when Amazon said its fourth-quarter sales and earnings fell short of expectations. Oh, and expect a miserable first quarter, too.
Shares in Amazon immediately jumped nearly 10 percent in after-hours trading, about the same amount that Apple fell after releasing its news.
What caught the eye of investors was that operating margins as a percent of consolidated sales rose to 3.2 percent, from 2.7 percent a year ago.
“The carrot for Amazon investors is improvements to margin over time,” said Gene Munster, an analyst with Piper Jaffray. Apple, on the other hand, would need to build a cheaper iPhone to keep growing as fast as it has been, which would slice into its margins.
For more than a decade, Amazon has teetered between minimal profits and no profits. In 2012, it said Tuesday, it lost money. But Wall Street has always been more about promises than results, and Amazon is always on the verge of converting its overwhelming online presence into buckets of cash.
“As long as the dream is there, the stock is going to go up,” Mr. Munster said.
The short-term news Tuesday was not good. Earnings per share fell to 21 cents from 38 cents in the fourth quarter of 2011. Although fourth-quarter revenue went up 22 percent to $21.27 billion, both revenue and earnings did not meet expectations. Analysts had predicted revenue of $22.2 billion and earnings of 27 cents a share.
Forget about all that. What mattered was the improvement in margin.
Amazon has had plenty of opportunities to raise its margins in the past, but has instead routinely chosen to reward customers with subsidized shipping and higher discounts. In a conference call with analysts on Tuesday, Tom Szkutak, Amazon’s chief financial officer, repeated this mantra.
“Putting customers first is the only reliable way to create lasting value for shareholders,” he said.
Investors took some time to buy into this idea. “Wall Street gets in a kerfuffle when we lower product prices and invest heavily in the future,” Jeff Bezos, Amazon’s chief executive, acknowledged in 2005, at a point when the stock had tumbled 40 percent in less than a year. “So don’t buy our stock — instead buy our products and enjoy our investments.”
That was bad advice. The stock is up almost 700 percent since then, hitting a record this month.
Shares in Amazon fell nearly $16 in regular trading Tuesday, to $260.35. After-hours, shares went up more than $22.
Jason Moser, an analyst with the Motley Fool, who owns shares in the retailer, said that “many investors, myself included, will more than likely watch this story play out for as long as it takes.”
Mr. Moser added in an e-mail message that the market was “betting a lot on what Amazon hasn’t done yet and betting on the fact that it will do it based on what it’s doing now.” He added, “Kind of a ‘build it and they will come’ sort of thing.”
Some analysts are still skeptical.
“It’s much easier to sell goods at cost the way Amazon does than sell goods at a 40 percent margin like Apple,” said Colin Gillis of BGC Partners. “Once you’ve trained your customers to buy at cost, it’s difficult to train them away from it.”
Still, Mr. Gillis said: “Who’s going to undercut Amazon? They’re only making half a cent on every dollar. Who can run a business at less profit?”
Amazon continues to expand. Last year, the retailer announced it was building a million-square-foot warehouse in Patterson, Calif., about 85 miles southeast of San Francisco. Last week, it announced another million-square-foot warehouse barely 30 miles north of Patterson, in Tracy. It obviously has designs on fast (if not quite same-day) shipping to the seven million generally affluent, Internet-using residents of the Bay Area.
“We’ll continue to expand our footprint over time and become even closer and closer to customers,” Mr. Szkutak said on the conference call.
Many of those shoppers will be buying material that originated not with Amazon but with more than two million third-party sellers. The volume of items sold by these firms during the 2012 holidays was up 40 percent from 2011. Some of these sellers merely used Amazon to digitally display their goods, while others also used the retailer to ship it.
Amazon said earlier this month that third-party sellers sold enough Santa hats during the holiday for Santa to wear a new hat every day for the next 127 years, and enough guitar picks to give one to every attendee of Woodstock — about a half-million. Analysts expect third-party sales to outpace Amazon deals over the next few years.
Recently several states, including California, successfully made deals with Amazon to collect sales tax. That had the effect of raising prices on many Amazon items by more than 5 percent. Land-based retailers, which had agitated for years for such a move, thought the tax might finally level the playing field.
Their hopes might be misplaced. Any drop in online sales from the collecting of sales tax tends to be temporary, said Scot Wingo, chief executive of ChannelAdvisor, which helps retailers sell online, including on Amazon.
Article source: http://www.nytimes.com/2013/01/30/technology/amazon-earnings.html?partner=rss&emc=rss
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