Amazon Reliant On Growth That's Not There

| About:, Inc. (AMZN)

After the bell on Tuesday, online retail giant Amazon (NASDAQ:AMZN) reported its fiscal fourth quarter and full year results. It was a mixed report for the fourth quarter, and the guidance was a bit disappointing. This doesn't bode well for the name in the short term, but it might create another buying opportunity like it did last quarter.

Fourth Quarter Results:

Amazon missed widely on its revenue numbers. Analysts were expecting $18.2 billion, with a range of $17.62 billion to $19.43 billion. However, analysts seem to have been expecting a lot. Amazon's own guidance was a bit lower, with a range of $16.45 billion to $18.65 billion (midpoint of $17.55 billion). So the midpoint guidance from Amazon was below the lowest estimate of the street.

Amazon missed with its revenues of $17.43 billion, which still represented a 35% growth rate over the prior year period. Analysts were looking for nearly 41% growth. That was the negative.

Now here are the positives. Amazon beat even the high end of its previous guidance for operating income, a range of a $200 million loss to $250 million gain. Amazon came in at $260 million. This helped Amazon beat on the bottom line, coming in at 38 cents, double what expectations called for at 19 cents. However, last year's period was 91 cents, so it was down by more than half. (See earnings call transcript.)

North American sales did fairly well, up 37% year over year, to $9.9 billion. Those include US and Canadian sales. However, international was a bit of a drag, only up 31%, to $7.53 billion. The main culprit was worldwide media sales, which only ended up rising 15%. Electronic and General Merchandise sales were up 48%.

Here are the key numbers from the fourth quarter, and comparisons to the two most recent fourth quarters.

4th Quarter 2009 2010 2011
Net Sales $9,519 $12,948 $17,431
Cost of Sales $7,543 $10,317 $13,830
Gross Margin $1,976 $2,631 $3,601
Operating Income $476 $474 $260
Net Income $384 $416 $177
EPS $0.85 $0.91 $0.38
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While the company is growing sales and its gross margin dollars, operating income has decreased two years in a row now. Amazon did improve gross margins slightly over the 2010 period, but as you see below, the bottom two margin numbers are concerning.

Margins 4Q 2009 4Q 2010 4Q 2011
Gross 20.76% 20.32% 20.66%
Operating 5.00% 3.66% 1.49%
Profit 4.03% 3.21% 1.02%
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Full Year Results:

Because of the revenue miss for the fourth quarter, Amazon obviously missed its revenue estimates for the year. Amazon came in at just below $48.1 billion, which was below the nearly $48.85 billion many were expecting. However, the 19 cent beat on the bottom line made Amazon beat on the full year, meaning that the year over year decrease in earnings wasn't as much as many were expecting.

Here are how the full year numbers break down:

Full Year 2009 2010 2011
Net Sales $24,509 $34,204 $48,077
Cost of Sales $18,978 $26,561 $37,288
Gross Margin $5,531 $7,643 $10,789
Operating Income $1,129 $1,406 $862
Net Income $902 $1,152 $631
EPS $2.04 $2.53 $1.37
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As with the quarterly numbers, Amazon improved its gross margin percentage for the year, but just slightly. Again though, it had severe declines in both operating margin and net profit margin.

Margins 2009 2010 2011
Gross 22.57% 22.35% 22.44%
Operating 4.61% 4.11% 1.79%
Profit 3.68% 3.37% 1.31%
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Amazon's net profit margins stand at about a third of what they did just a few years ago. While this company has not been known for its high margins lately, investors will want improvement at some point.

First Quarter Guidance:

Amazon sold off last quarter when it missed on earnings per share and guidance numbers were a little troublesome. This quarter, the stock traded down in after hours primarily because of the guidance.

Amazon stated that Q1 revenues would be in a range of $12.0 to $13.4 billion, with a midpoint of $12.7 billion. That was extremely light of the $13.41 billion expected, which, yes, means that the high end of Amazon's range was just below analyst expectations. Analysts had a range of $12.97 billion to $14.89 billion. The growth does not appear to be there, and that is why shares will trade down.

Amazon also gave operating income guidance. The range was from a loss of $200 million to a gain of $100 million. That means the midpoint actually guides to an operating loss for the company in the first quarter. Not a good sign, although to give them credit, they did beat the high end of their operating income range in the 4th quarter.

Balance Sheet Data:

The following table shows some key balance sheet numbers and financial ratios for Amazon.

Financials 12/31/2010 9/30/2011 12/31/2011
Current Assets $13,747 $11,904 $17,490
Total Assets $18,797 $19,054 $25,278
Current Liabilities $10,372 $8,978 $14,896
Total Liabilities $11,933 $11,288 $17,521
Current Ratio 1.33 1.33 1.17
Working Capital $3,375 $2,926 $2,594
Debt Ratio 63.48% 59.24% 69.31%
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Amazon greatly expanded its balance sheet in the fourth quarter, and its liabilities did increase quite a bit faster than its assets did. Amazon is not in any financial trouble at the moment, and they hinted during the conference call that they would be willing to buy back stock at the right price. However, I'd like to see them lower their liabilities a little bit first, and get that working capital number up a little.

Competitive Landscape:

Amazon entered a new line of business when they launched the Kindle Fire recently. However, even if they sold 6 million units, which seems rather high to me, we found out last week that Apple's (NASDAQ:AAPL) iPad sold more than 15 million. Amazon cannot compete with Apple, everyone knows that. Apple will launch a new version of the iPad this year, which will probably be another win for the company. Amazon's Kindle seemed to boost Amazon's image for a while, but it appears that their overall sales did not reflect the optimism in the marketplace.

Is Amazon's future in the tablet market? Probably not. Another idea that has been kicked around recently is Amazon heavily focusing on a streaming business to compete with Netflix (NASDAQ:NFLX). They already have a Lovefilm subsidiary with a DVD business in the UK. However, BSkyB announced today that they will be launching a streaming service, so Amazon probably won't try to compete with two firms in the UK. Amazon is beefing up its content library, but we know that the streaming business is very low margin, so it won't really improve Amazon's low margins.

In terms of retail sales, Amazon has tons of places to compete with. We know that Best Buy (NYSE:BBY) has struggled a lot lately, and I can personally say that I've bought a ton on Amazon in the past two years that I normally would have gotten from Best Buy. However, there have been some items lately on Amazon whose prices weren't that great, so Amazon faces the old issue: If we lower prices, we get the sale, but we lose the profits; If we keep the price high, we may lose the sale. Amazon needs the sales right now, the profits can come later.

Conclusion - Wait Before Buying:

Just like I would advise you to wait before buying something instantly when you see it on Amazon, I would suggest waiting on buying the stock after earnings. Shares are going to pull back, just like they did last quarter. Amazon dropped from $227 to $198 after last quarter's earnings report, and ended up below $170 a month or two later. I don't think we'll see a low point in the stock this week. The sales number was disappointing, and the guidance was too. This company has traded off of its sales growth, not its earnings growth, so it needs the sales to rise for its stock to as well. I don't think it is unreasonable for Amazon to trade down to $160 in the near future, or maybe even $150. However, it should rebound from there. Amazon did get back to $195 before this report, up about $30 off its low. Amazon always makes a ton of investments in its future, and those are just not paying off at the moment. Investors will hope that 2012 doesn't turn out to be as disappointing as some may think it might after these quarterly numbers we saw on Tuesday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.