Amazon Beats, But Gains Evaporate on Margin Concerns

Shares of internet retailer Amazon.com fell almost 11% in post-market trading Tuesday, reliquishing a 10.6% gain during regular-hours, after the company announced stronger-than-forecasted earnings and revenue and guided up for Q4, but failed to satisfy investors' sky-high expectations. Earnings more than quadrupled, to $80 million ($0.19/share), up from $19 million ($0.05/share) a year ago. Revenue jumped 41% to $3.26 billion from $2.31 billion after the company sold 2.5 million copies of the new Harry Potter book. Analysts surveyed by Reuters were expecting net income of $78.8 million ($0.18/share) on revenue of $3.13 billion. The company said it expects Q4 net sales of between $5.1 billion and $5.45 billion. Q4 operating income is expected to be between $221 million and $291 million, giving a mid-point estimate of $256 million, which was lower than the $265 million analysts had been forecasting, on Q4 revenue of $5.13 billion. Incremental margin was 11.0%, down from 11.4% in Q2. Gross margin of 23.4% was down 0.4% year-over-year; North American gross margin fell 1.6%, while international gross margin gained 0.9%. Gross margin trends, Citigroup analyst Mark Mahaney noted, were negatively impacted by Harry Potter sales. "The concern is probably the margin guidance," Lazard Capital Markets' analyst Colin Sebastian said. "The quarter looks very good. Strong growth across the board, and the third-party marketplace is still growing," (full earnings call transcript). Despite its sterling growth, some analysts say Amazon, which trades at 59x 2008e earnings, compared with eBay at 22x, and Wal-Mart at 13x, is fully valued. Amazon's stock, which closed Tuesday above $100 for the first time since 2000, has risen more than 140% YTD.

Sources: Press release, Reuters
Commentary: Amazon Fails to Impress • 6 Problematic Valuation Issues With Amazon • Amazon: Teetering on a Sell-Off
Stocks to watch: AMZN. Competitors: EBAY, AAPL, BKS, OSTK. ETFs: HHH, RTH, FDN
Earnings call transcript: Amazon.com Q3 2007

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