Amazon Profit Misses Estimates; Shares Tumble

Amazon Profit Misses Estimates; Shares Tumble

Amazon.com Inc. (AMZN), the world’s largest Internet retailer, reported a plunge in third-quarter profit after it ramped up spending on new products such as the Kindle Fire tablet. The shares tumbled 19 percent in late trading.

Net income fell 73 percent to $63 million, or 14 cents a share, from $231 million, or 51 cents, a year earlier, the Seattle-based company said today in a statement. That compared with 24 cents predicted by analysts on average, according to Bloomberg data. Net sales climbed 44 percent to $10.9 billion, in line with estimates.

Amazon is sacrificing profit margins in search of sales volume and market-share gains against companies such as Apple Inc. (AAPL) The company is selling its Kindle Fire tablet for as low as $199, less than half the price of Apple’s cheapest iPad. Chief Executive Officer Jeff Bezos is counting on sales of music, books, movies and merchandise on the tablet to make up for selling the product at a loss -- estimated by IHS Inc. (IHS) to be about $10 per device.

“Amazon has the lowest operating margin and the highest valuation in our technology company coverage,” Colin Gillis, an analyst at BGC Partners LP who rates the stock a “sell,” said in a note today. “The company is not likely to achieve material leverage off its revenue growth as costs associated with investments into its digital platforms build.”

The online retailer’s shares have gained 26 percent in 2011 and reached a record of $246.71 this month, raising pressure on Amazon to deliver results. The shares plummeted to as low as $184.59 in late trading, following a decline of 4.4 percent at the close today in New York.

Loss Projected
The company forecast an operating loss of as much as $200 million in the fourth quarter, with sales of $16.5 billion to $18.7 billion.

Even as profit shrinks, Amazon sales are benefiting from surging Kindle orders, propelled by customers ditching paper books in favor of electronic versions. The company upgraded its Kindle e-readers and introduced the Kindle Fire tablet to more directly challenge Apple -- something Hewlett-Packard Co. (HPQ) and Research In Motion Ltd. (RIM) have struggled to do. The Fire tablet, due next month, has a 7-inch display, smaller than the iPad’s 9.7-inch screen. It will run on Google Inc.’s Android software and offer Wi-Fi connectivity.

The Kindle Fire’s $199 price will help Amazon sell 4.5 million of them in the fourth quarter, estimates Anthony DiClemente, an analyst at Barclays Plc.

That growth may come at the expense of margins. Amazon is pricing its devices to spur sales, and “they don’t care that the operating margin is 1 percent or 2 percent,” said Kerry Rice, an analyst at Needham & Co. in San Francisco.

Amazon also is at risk from the drop in sales of traditional media, even as it benefits from the shift to digital, Gillis said.

“Amazon is neither the fastest growing, or most profitable, company in our coverage and given the disruption occurring in physical books, music and movies, it is hard to justify the premium valuation,” he said.

source: bloomberg.com