Palm Beach, FL 2/1/12 (StreetBeat) – Amazon.com’s (Nasdaq: AMZN) plans for world domination hit a slight bump on Tuesday. For years, the retailer has been telling Wall Street to ignore how little money it was making and focus instead on the fact that it was bringing in more and more customers and keeping them so happy they never went anywhere else for anything.In Amazon’s fourth-quarter results, however, investors finally glimpsed off in the distance that growth beginning to flatten. Its revenue rose to $17.43 billion, up 35 percent. Most retailers would die happy with such a jump. But for the e-commerce leader, sales were nearly a billion dollars short of what analysts had been expecting.
Even as investors are panting for Facebook’s public stock offering, established Internet stars are disappointing. Amazon’s poor showing came on the heels of a similar miss from Google. Among the reasons for Amazon’s missed expectations: Video games were lackluster. There were supply issues from flooding in Thailand. And maybe there was a bit of backlash.
In December, Amazon.com created an uproar by encouraging customers to use a price-checking app on Main Street and in the malls, and then return to Amazon for a better deal. Booksellers, who have long felt themselves in the retailer’s cross hairs, were particularly offended. A tentative “buy local” movement sprang up.
In its earnings release, Amazon also warned that it could lose money in the current quarter, offering a range between $100 million in operating income and a $200 million loss. Shares of Amazon, which rose $2.29 to $194.44 on Tuesday, immediately slumped in after-hours trading by $18.
“With the valuation Amazon is carrying, you got to perform,” said Colin Gillis, senior technology analyst for BGC Financial. “You’ve got to be like Apple — smash through the numbers people are afraid even to whisper. Instead, they’re only making slightly over a penny on every dollar in revenue. That’s pathetic in any industry.”
Other analysts were more optimistic. “The long-term story is very much intact,” said Scott Devitt of Morgan Stanley, although he noted that investors might not be buying the stock for the next six months or so. The biggest question on the mind of analysts going into this earnings report was, How well did the Kindle Fire do? But they knew what the answer was, which was that Amazon was not going to tell them.
“We were very pleased with the great growth we had,” said Tom Szkutak, Amazon’s chief financial officer, in a conference call. The only data Amazon would share about Kindles is that their sales were up 177 percent from the fourth quarter of 2010.
“That seems like a healthy business,” Mr. Devitt said.
If sales were weaker than expected, profits were higher than forecast. Net income decreased 58 percent to $177 million in the fourth quarter, or 38 cents a share, compared with $416 million, or 91 cents a share, in the year-earlier period. Analysts expected sales of $18.3 billion and earnings per share of 17 cents, according to FactSet Research. The company said earlier that it might lose money during the quarter, traditionally the best part of the year for any retailer.
Amazon has been in the enviable position of growing much faster than the industry itself. But all that meteoric growth, stoked by selling goods as cheaply as possible and then shipping them either for a pittance or free, does not leave much room for profit. Its margins declined for four quarters before rebounding in the fourth quarter.
Yet even as margins have suffered, the stock has been strong. Ever since its founding in 1994, Amazon has built for the future. “We’d rather have a very large customer base and low margins than a smaller customer base and higher margins,” Amazon’s chief executive, Jeff Bezos, explained in a recent interview with Wired magazine.
For a company often thought of as virtual, with its e-books and vibrant cloud computing service, Amazon is increasingly rooted in the real world. Delivering sneakers and diapers and Kindles to the masses requires a lot of warehouses and a lot of warehouse workers. Nomura Securities estimated this week that Amazon would add the rough equivalent of 450 Costco stores from 2011 to 2016. Costco, by comparison, has 592 stores worldwide. “E-commerce is a long secular growth story,” Brian Nowak, a Nomura analyst, said in the report. “We’re still at only 5 percent penetration. So there’s a lot of runway left.”
The Fire was unveiled with the sort of splash not seen since Apple introduced the iPad two years ago. But where the acclaim for the iPad only grew once users had it in hand, the Kindle Fire has been subject to some grumbling by some early customers, which has in turn produced crankiness from the device’s fans.
Despite the dispute, which shows signs of resembling a high-tech Hatfield and McCoys-style feud, the $199 Fire and the $499 iPad are not necessarily competitors. Analysts have been estimating that Amazon sold as many as six million Fires plus millions more traditional Kindles.
Apple said last week that it sold more than 15 million iPads during its fourth quarter, drawing customers who might otherwise have bought Macs or Windows-based PCs. The introduction of the Fire, said Apple’s chief executive, Timothy D. Cook, did not have “an obvious effect” on the iPad.
About 27 percent of the Fire reviews on Amazon’s own site have mixed to negative feelings about the device, down from a third immediately after its debut.
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