Investments Stump Amazon's Profit Margins; Stock Crashes

Amazon.com Inc warned of a possible operating loss in the first quarter following a sharp drop in fourth-quarter profit, a sign that the online retailer will keep spending heavily on expansion at the expense of short-term returns.

Shares of the company fell more than 8 per cent.

Amazon forecast first-quarter operating results ranging from a loss of $200 million to a profit of $100 million, below Wall Street expectations.

Amazon has been growing at least twice as fast as the e-commerce sector in recent years. To keep up that pace, the company is expanding into new categories and regions, spending heavily on growth and crushing profit margins.

Amazon's first-quarter forecast suggests the company may continue this heavy investment.

"The wide range reflects the investments that we're making," Amazon Chief Financial Officer Tom Szkutak told reporters on a conference call. "We have a lot of opportunities to invest in .... You're seeing more of that in Q1."

'Diminishing Return'

Amazon's first-quarter revenue forecast also disappointed. The company said it expects sales of $12 billion to $13.4 billion in the period, while Wall Street was looking for $13.4 billion, according to Thomson Reuters I/B/E/S.

"The big surprise for investors tonight is just what appears to be a diminishing return on investment," Gene Munster, an analyst at Piper Jaffray, said during a conference call with Szkutak, after noting that previous growth numbers had been impressive.

The CFO said year-over-year unit growth of 46 per cent in the fourth quarter was one result of Amazon's recent spending spree.

Szkutak also noted that a weak European economy dented Amazon's growth, while flooding in Thailand caused some supply problems.

But the executive argued that other growth opportunities, such as the company's Kindle e-reader and tablet business, were so attractive that they deserved heavy investment.

"So your outlook in terms of investment philosophy hasn't changed versus last quarter going forward?" Muster asked.

"No," Szkutak said.

Shares Drop

Amazon shares dropped 8.9 per cent to $177.20 in after-hours trading following the results. The stock has fallen more than 20 per cent since hitting a record in October, partly on concern about how much the company is investing.

Still, the stock trades at more than 70 times earnings, while the average company in the Standard & Poor's 500 index changes hands below 20 times profit, according to Thomson Reuters data.

"Amazon is not a cheap stock, so any type of disappointment, we typically see a pretty meaningful reaction by the market," James Lee, analyst at Credit Agricole, said.

Amazon is spending in three main areas: fulfillment centers to support its online retail business; content for video streaming and other media businesses; and technology infrastructure for its cloud computing service.

One of Amazon's latest ventures is the Kindle Fire tablet, which some analysts estimate the company is selling at break-even or at a small loss.

On Tuesday, Amazon said sales of all types of Kindle devices, including cheaper e-readers, jumped 177 percent over the nine-week holiday period ending Dec 31, versus the same period a year earlier.

Amazon CFO Szkutak said he was "very encouraged" by early spending habits of Kindle Fire owners, who are buying more digital content such as e-books, video, music and apps.

Amazon reported that the number of videos purchased or rented from Amazon's Instant Video service - and the number of customers of the service - more than doubled in the fourth quarter, versus a year earlier.

The number of videos streamed through Amazon's Prime Instant Video service jumped almost 300 per cent in the fourth quarter compared to the previous quarter, the company also said.

Customers downloaded more apps from the Amazon Appstore during the fourth quarter than they had during all previous quarters combined, the company added.

"We are looking at just a lot of positive things across the business in terms of adoption of our digital offerings, very specifically Kindle growth from a device standpoint and the content that's following that," Szkutak said.

The CFO said Amazon will continue to add more content for its video services.

Amazon said fourth-quarter net income was $177 million, or 38 cents per share, down from $416 million, or 91 cents per share, a year earlier.

Revenue came in at $17.43 billion, up 35 per cent from the fourth-quarter of 2010.