Amazon After The Fall

By Greg Sushinsky | February 07, 2011 AAA

Online retailer Amazon.com (Nasdaq:AMZN) experienced a real market downer after its earnings report disappointed. The stock initially took a 9% header in after-hours trading and ended the week beneath its pre-reporting price. Although the company reported revenue and earnings increases, the share price still suffered.

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Margin and Forecast Concerns
Sales for the fourth quarter were slightly lower than expected, but what really concerned the Street are Amazon's margins. Despite the increase in online retailing, Amazon has had to keep prices for its goods down due to intense competition. While the company exceeded the $10 billion revenue mark for the first time in a quarter (it racked up $12.95 billion in sales) analysts were looking for a shade over $13 billion. The company announced it's going to increase its spending on infrastructure and that first-quarter profits may be dampened compared to last year.

High Flying Expectations
Amazon stock has risen 75% from its 52-week low in July and quadrupled in the last two years. While other consumer-tech stocks such as eBay (Nasdaq:EBAY), Google (Nasdaq:GOOG), Yahoo! (Nasdaq:YHOO) and Netflix (Nasdaq:NFLX) reported earnings to investors' liking, Amazon failed to meet the high expectations. The particular contrast with Netflix's torrid earnings didn't help the reception Amazon stock received. Along with this, Amazon forecast first quarter operating profit in the $260 million to $385 million range, and $9.1 billion for revenue, compared to the Street's expectations of $474 million and $9.3 billion respectively.

The Quarter's Performance
Sales did rise 36% in the fourth quarter, year over year. Profits were up 8%, to $416 million or 91 cents a share, compared to $384 million 85 cents in the year ago quarter. For the year, Amazon earned $1.15 billion or $2.53 per share, compared to $902 million or $2.04 per share. This is a strong performance. Amazon's earnings growth rate for the last 12 months is more than 27%, but its current PE is 69.

Warehouses, Kindles, Acquisitions and More
Amazon has grown stupendously beyond the modest online mail order bookseller it began its life as. Now it sells ebooks and its own e-reader, Kindle, along with all kinds of other goods. It has warehouses (and will have more), has bought into other internet companies and now features its Amazon Web Services for data storage and computer apps. Wall Street is reading these trends of Amazon's business diversity as diffusion into lower-margin areas.

Growth Slows
While Amazon's business isn't growing like it used to - a near impossibility given its size now, this isn't necessarily a bad thing. Amazon confidently continues to invest in itself, and as the company continues to mature, it will likely still feature a robust but not outsized growth rate. The stock price may continue retreating. This doesn't make it a sleepy stock yet, though it might have a value component - again, that's not necessarily a bad thing for long-term buyers.

The Bottom Line
Jeff Bezos and the management team at Amazon have built a juggernaut: The dominant online retailer. One look at the thrashed booksellers Borders Group (NYSE:BGP) and Barnes & Noble (NYSE:BKS), two stocks pierced in the heart by Amazon's competitive power, will remind investors of this company's potency as an online retailer. Down the line, Amazon will continue to thrive. (To learn more, see A Primer On Investing In The Tech Industry.)

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