Amazon.com Inc. (AMZN) fell the most in three months after
sales missed estimates, signaling that its investments in media services,
Kindle devices and shipping promotions have been slow to pay off.
Amazon shares dropped 7.7 percent to $179.46 after the
Seattle-based company said yesterday that fourth-quarter revenue was $17.4
billion, trailing the $18.3 billion estimated by analysts in a Bloomberg
survey. It was the biggest one-day stock decline since Oct. 26.
Amazon, the world’s largest Internet retailer, got less
revenue from digital media than anticipated, especially in the video-game
market. The company also is relying more on third- party sellers, which can
bolster profit but generate less revenue than direct sales. Amazon has
conditioned investors to expect stronger growth, making the latest results
disappointing, said Colin Gillis, an analyst at BGC Partners LP in New York.
“To miss on the top line, that’s what breaks the momentum,”
said Gillis, who recommends selling Amazon stock.
Net income fell 57 percent to $177 million, or 38 cents a
share, from $416 million, or 91 cents, a year earlier, the company said in a
statement.
First-quarter operating income may range from a loss of $200
million to a gain of $100 million, the company said. Analysts were projecting a
profit of $268.1 million. Sales will be $12 billion to $13.4 billion, Amazon
said, compared with an estimate at the top of that range.
Hard to Explain
Chief Executive Officer Jeff Bezos is squeezing margins in
search of growth, looking to add customers by pushing free shipping and
offering its Kindle devices at cut-rate prices. While investors were expecting
profit to take a hit, the sales slowdown is harder to accept, said Brian Nowak,
an analyst at Nomura Securities International Inc. in New York. The reasons
outlined by the company don’t seem to fully account for the sluggishness, said
Nowak, who rates Amazon shares “neutral.”
Amazon’s third-party sellers use the company’s site to hawk
their products and then provide a commission. Unit sales by outside retailers
increased 65 percent during the holiday quarter and now make up 36 percent of
units sold, Bezos said in the statement. Total sales rose 35 percent.
“Whenever there’s a mix-shift toward third party, it helps
margins, but it reduces revenue,” said Colin Sebastian, an analyst at Robert W.
Baird & Co. in San Francisco. He has an “outperform” rating on Amazon’s
stock.
Earnings Top Estimates
The shift helped earnings top estimates last quarter, even
with the sales shortfall. Analysts projected 16 cents a share. Still, the
operating margin tightened to 1.5 percent in the period, from 3.7 percent a
year earlier.
“Trying to predict during a seasonal Q4 is challenging,” Tom
Szkutak, Amazon’s chief financial officer, said on a conference call. “That
third-party increase is great for customers, great for sellers and helped our
bottom line.”
Amazon’s Prime program, which offers unlimited two-day
shipping for $79 a year, boosted expenses over the holiday shopping season,
said Jason Helfstein, an analyst at New York- based Oppenheimer & Co.
“With shipping, if you look at that net loss number as a
percentage of revenue, it keeps going up,” he said. “They’re trying their best
to offset that in other ways.”
The money-losing Kindle Fire tablet also has raised
expenses. At $199, the device is less than half the price of Apple Inc.
(AAPL)’s cheapest iPad. The expectation is that consumers will spend the money
they save on Amazon’s e-books and video content, Jordan Rohan, an analyst at
Stifel Nicolaus & Co., said in a note this week. That eventually will more
than make up for revenue lost selling the device, he said.
Video-Game Decline
For now, Amazon’s media sales aren’t growing as quickly as
anticipated. U.S. media revenue climbed 8.1 percent last quarter, about half
the 15 percent that Sebastian was predicting. The decline in video-game sales
hurt the unit’s results, Szkutak said.
Investors had speculated that the company would get a bigger
boost from a 15 percent gain in industrywide holiday e- commerce spending,
which ComScore Inc. (SCOR) pegged at a record $37.2 billion.
Shareholders may now be wondering if the stock has become
too expensive, Gillis said. It trades at 141.9 times earnings over the past 12
months, according to data compiled by Bloomberg. By comparison, Apple’s
price-to-earnings ratio is 13.
“When you have revenue growth start to stall, then the
valuation question marks start to rise,” he said.
The company also elaborated on its potential risks in a
filing today. Amazon said it relies on third-party providers for the
technologies that encrypt, authenticate and send confidential information, and
that a security attack could result in litigation.
