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Amazon.com’s (NasdaqGS: AMZN) Sales Miss: Big Setback or “No Big Deal”?

By Chad Fraser on February 2, 2012

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Technology investors who weren’t focused on the long-awaited Facebook IPO filing yesterday were taking a close look at the latest quarterly results from Amazon.com (NasdaqGS: AMZN) .

What they saw prompted them to hit the restart button on the e-commerce giant, sending its shares down 7.7% on the day — its largest one-day loss in three months.

Amazon.com: Slowing Revenue and Weak First-Quarter Guidance

In the fourth quarter of 2011, Amazon’s profits slumped 58%, to $177 million, or $0.38 a share, from $474 million, or $0.91 a share, a year ago. Despite the drop, they were still way ahead of the $0.17 a share that analysts were expecting.

Sales jumped 35%, to $17.4 billion from $12.95 billion. But that was still nearly $1 billion short of the $18.3 billion that the Street was expecting—and that was the part of the story that investors zeroed in on. The company pointed to a slowdown in video game sales as one reason for the miss.

In addition, Amazon.com said it now expects sales of between $12.0 billion and $13.4 billion in the first quarter of 2012. Analysts had been forecasting sales of $13.41 billion.

Jeff Bezos, the founder and CEO of Amazon.com, focused on strong sales of the Kindle e-reader (up 177% from a year ago) in his remarks:

We are grateful to the millions of customers who purchased the Kindle Fire [the company’s tablet computer, launched during the quarter] and Kindle e-reader devices this holiday season, making Kindle our bestselling product across both the U.S. and Europe.

Worries About Profit Margins at Amazon.com Overshadow Soaring “Kindle Fire” Sales

MarketWatch.com neatly summarized investors’ response to the numbers in its report: “The most worrisome aspect of Amazon’s report was its sales picture. The final three months of the year, coinciding with a normally robust holiday spending period, should have been a bonanza for a consumer-driven operation like Amazon. But the revenue miss certainly will make people wonder whether the retailer’s growth is now waning.”

In addition, there was a big jump in the number of units sold by other vendors through Amazon’s sites. In his Tech Trader Daily blog on Barrons.com, Tiernan Ray noted that this gave some analysts pause, including Mayuresh Masurekar of Collins Stewart:

Amazon books a significantly lower amount as revenue (only 6% to15% of merchandise sales) for third-party units as compared to Amazon’s own unit sales for the same volume of sold merchandise. Third-party units grew 65% year over year vs. 35% for Amazon’s own units … That said, paid units grew 46% year over year, indicating continued volume growth and share gains.

Analysts Split on the Prospects of Amazon.com but Agree It’s All About the Kindle

The news brought out a bundle of firewood-themed headlines in the press. In an article entitled “Turning Amazon Cash to Kindling,” John Jannarone of the Wall Street Journal noted that “Until now, many investors have let the company get away with shrinking operating margins for the sake of gains in market share. But if sales growth slows, investors may pay closer attention to expenses.”

Also raising concern was the fact that Amazon.com  is likely selling the Kindle Fire at a small loss (the device retails for just $199 compared to $499 for an iPad) in hopes of closing the gap later by selling content to users. Jannarone argued that the company may not have much flexibility if its profits turn to losses, as its $9.6-billion cash holding is small next to Apple’s nearly $100-billion stash.

Zerohedge.com in an article entitled “Goldman Puts More Kindling on the Fire” points out that Goldman Sachs had cut its price target to $182 from $190, mainly due to the company’s lowered guidance. The site quoted the brokerage’s latest research report on the stock, which sounded less than impressed with the Kindle Fire’s performance:

As for its Kindle and Kindle Fire performance in 4Q2011, we estimate sales hit 10.6 million [units], below our forecast of 13.9 million. That said, we believe the company hit our more important Kindle Fire unit forecast of 6 million, suggesting the Fire cannibalized sales of traditional e-readers.

Zerohedge’s prescription? “Time for Amazon to make up for ever lower margins with even higher volume. Or something.”

Amazon’s Sales Miss “No Big Deal” for Cheerleader Analysts

But for every analyst who was cutting their price on the stock, there seemed to be another who called the decline a buying opportunity.

In an article entitled “AMZN’s Miss: No Big Deal,” Olivia Oran of TheStreet.com argued that “as the company shifts from its role as an online bookseller to a technology and entertainment provider, it is upping its investment in hardware, infrastructure and digital content.” In particular, she points to a 66% jump in spending on technology and content from a year ago.

Deutsche Bank analyst Jeetil Patel agreed:

We reiterate our buy investment rating on shares of Amazon.com, and believe that the pullback in the stock presents an opportunity for growth-oriented investors looking for the ecommerce leader to resume operating profit dollar growth in the second half of 2012.

Despite Mr. Patel’s buy recommendation, it’s hard for value investors like us at Investing Daily to understand how the stock of a company with slowing revenue and which trades for a price-to-earnings ratio of greater than 100 is a bargain by any stretch of the imagination.

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