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Amazon.com Continues to Defy Gravity

By Chad Fraser on January 30, 2013

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“If Ronald Reagan was the Teflon president, Amazon is the Teflon stock.”

—Investing Daily Senior Editor Jim Fink

Three months ago, Amazon.com (NasdaqGS: AMZN) reported its first loss since 2003. The stock rallied 7% on the news.

On Tuesday night, history repeated itself; there was no loss this time, though profits declined to razor-thin levels, the company missed expectations on the top and bottom lines (and fell short on its first quarter outlook) … and the stock rose nearly 9% in after-hours trading.

As Investing Daily’s Jim Fink wrote in “Amazing Amazon.com: First Loss Since 2003 and Stock Keeps Rising,” Amazon.com is one of a handful of stocks that are impossible to analyze because investors are “enamored by the story. Silly things like a company’s profits have no bearing on the stock price.”

“In the 1989 movie Field of Dreams, the faith-based mantra was ‘If you build it, he will come’—meaning the baseball ghost of Shoeless Joe Jackson, the star of the1919 White Sox World Series team,” wrote Fink. “Investors are showing a similar type of faith in Amazon.com’s promise that profits will someday come.”

Last night, for example, investors zeroed in on two figures in the latest report from Amazon.com to buoy their hopes: gross margin and operating earnings. The former rose to 24.1% from 20.7% a year ago, and the company’s operating profits jumped 56%, to $405 million from $260 million.

“Earnings are out and Amazon longs will throw a massive party because gross margin jumped 347 basis points,” Abe Garver, managing director of BG Strategic Advisors, told Fox Business.

Weak Profits, Surging Sales Are Nothing New for Amazon.com

In the fourth quarter, Amazon’s sales rose 22.0%, to $21.27 billion from $17.43 billion a year ago. Net earnings, however, fell 45%, to $97 million, or $0.21 a share, from $177 million, or $0.38. Both figures missed the consensus forecast of $0.28 a share in profits on revenue of $22.26 billion.

For the first quarter of 2013, the company forecasts sales of 15.0 billion to $16.6 billion, below analysts’ expectations of $16.8 billion. Amazon.com sees its operating income ranging between a loss of $285 million and $65-million profit.

In the fourth quarter, the company saw sales gains across all of its segments and all regions: North American sales jumped 22.9%, to $12.2 billion, while international sales gained 20.8%, to $9.09 billion. Amazon.com doesn’t typically break out its sales by product, but the company said its Kindle Fire HD, Kindle Fire, Kindle Paperwhite and Kindle devices held the top four spots on its bestseller lists since launch.

Amazon.com also saw strong growth in e-books: “After 5 years, eBooks is a multi-billion dollar category for us and growing fast—up approximately 70% last year,” said CEO Jeff Bezos. “In contrast, our physical book sales experienced the lowest December growth rate in our 17 years as a book seller, up just 5%.”

At the same time, however, Amazon.com continues to spend aggressively to take market share from both other online retailers and brick-and-mortar stores. Its cost of sales soared 16.7% in the latest quarter from a year earlier; it also spent 36% more on fulfillment, 43.5% more on marketing and a whopping 56% more on content, helping boost its digital media selection to over 23 million titles, including books, magazines, games and movies.

During the year, the company went on a warehouse-building binge, putting up new distribution centers across the U.S., mostly near major cities. The will help speed up delivery times, with the company possibly eyeing a same-day delivery model, an area that eBay (NasdaqGS: EBAY) has recently been exploring.

To further undercut the competition, the company offers bargain-basement shipping deals, such as its Amazon Prime service, which charges members just $79 a year to have all their goods shipped to them for free within two days. Members also get unlimited streaming through Amazon Instant Video and a free Kindle book to borrow each month from the Kindle Owners’ Lending Library.

Amazon.com Still Has Its Skeptics

All of this calls into question not just when but how Amazon’s rising sales will translate into higher profits. “It’s much easier to sell goods at cost the way Amazon does than sell goods at a 40 percent margin like Apple,” analyst Colin Gillis of BGC Partners told the New York Times on Tuesday. “Once you’ve trained your customers to buy at cost, it’s difficult to train them away from it.”

Even so, he added: “Who’s going to undercut Amazon? They’re only making half a cent on every dollar. Who can run a business at less profit?”

Another factor that could have an impact on Amazon’s business is the fact that it must now collect sales tax in some parts of the U.S. That removes a long-time advantage that the online retailer had over its brick-and-mortar counterparts.

For all of 2012, Amazon reported a net loss of $39 million, or $0.09 a share. However, analyst estimates call for earnings of $1.70 a share in 2013. The stock trades at 153.1 times that forecast.

“I can’t recommend buying this stock—or any stock—that trades at such a nosebleed valuation,” wrote Fink back in October. “But I would rather walk over 100 yards of red-hot coals than short the stock, either.”

What do you think of this article? Please post your feedback in the “comments” section below!

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  1. avatar
    John Bezniak Reply February 2, 2013 at 2:12 PM EDT

    Mr. Fink’s observations are dead-on. One should neither buy nor short AMZN because Americans are in love with the bargains that the Amazon dynasty providfes. Amazon offers “just enough” great bargains to keep us happy. But this love affair goes a little deeper than that. We are also in love with Pyramid Type Schemes (do any recent ones in the news comes to mind?), and many of us are happy to pay nosebleed prices for stocks for companies that we “think” will make us rich. Amazon masterfully marketed their Kindle products by paying for the Kindle by selling it at or below cost simply by taking the profits from their other businesses (as well as investors). How is that for a sales strategy?
    They also do this with their Prime plan, they do it with their hundreds of loss leaders, and they are convinced that this is a sustainable model forever – as long as stock investors are willing to pay for all these great and masterful marketing schemes (for the lack of a better word to call this).
    Some day, books and business education manuals will be written about this highly unusual and very intricate business model that is like none other before it or since.
    Only a genius like Bezos could have managed it. But geniuses come in all types of flavors.
    Bezos endeared himself to thousands of “rich benefactors” in his original Amazon model, and he has been brilliantly using this non-ending “goodwill” to keep taking investor’s money and paying for his interesting but ultimately unprofitable marketing strategies.
    Eventually someone will yell out: “the Emperor has no clothes” and the whole thing will come tumbling down.
    Meanwhile, enjoy the benefits that Amazon bestows on us for they will not last forever.