Amazon.com - Shares Are Trading Unchanged Despite Soft 'Holiday' Outlook

Oct.26.12 | About: Amazon.com, Inc. (AMZN)

Shares of Amazon.com (AMZN) are trading roughly unchanged in after hours trading. The internet retailer announced its third quarter results after the close. Shares initially spiked downwards, but quickly recovered to levels around the close in the regular trading session.

Third Quarter Results

Amazon.com reported third quarter revenues of $13.81 billion, up 27% on the year. A strong US dollar lowered revenues by $348 million. In constant currencies, revenues were up 30%. On average, analysts expected the company to generate revenues of $13.9 billion.

The company reported an operating loss of $28 million for the quarter, compared to an operating income of $79 million in the third quarter last year. On average, analysts expected the company to report an operating loss of $42.1 million.

The company reported a net loss of $274 million, or $0.60 per diluted share. This compares to a net income of $63 million, or $0.14 per diluted share last year. Amazon.com took a $169 million impairment charge related to the company's equity investment in LivingSocial.

Worlwide shipping revenues rose 44% to $517 million. Shipping costs rose 26% to $1.15 billion, resulting in net shipping costs of $636 million, up 14% on the year.

Founder and CEO Jeff Bezos commented on the results, "Our approach is to work hard to charge less. Sell devices near breakeven and you can pack a lot of sophisticated hardware into a very low price point. And our approach is working - the $199 Kindle Fire HD is the #1 bestselling products across Amazon worldwide. Incredibly, this is true even as measured by unit sales. The next two bestselling products worldwide are even Kindle Paperwhite and our $69 Kindle. We're selling more of each of these devices than the $4 bestselling product, book three of the Fifty Shades of Grey series. And we haven't even started shipping our best tablet - the $299 Kindle Fire HD 8.9" ships November 20."

Segmental Information

North America

The North American division reported a 32.9% increase in revenues to $7.88 billion. Media revenues rose 15.0% to $2.21 billion. Electronics and general merchandise revenues rose 39.2% to $5.06 billion. Other revenues rose by 64.2% to $608 million.

Operating income more than doubled to $291 million. Operating margins improved some 130 basis points to 3.7%.

International

Revenues for the international division rose 19.8% to $5.92 billion. Media revenues rose 10.8% to $4.60 billion. Electronics and general merchandise revenues rose 35.5% to $8.56 billion. Other revenues rose 59.2% to $648 million.

The company reported an operating loss of $59 million, compared to a profit of $116 million last year. The company reported a negative operating margin of 1.0%, compared to a positive margin of 2.3% last year.

Outlook

For the important fourth quarter of 2012, Amazon.com expects sales to come in between $20.25-$22.75 billion. This represents year-on-year growth between 16 and 31%. On average, analysts expected Amazon.com to guide for "holiday" quarter sales of $22.8 billion.

The company is expected to report an operating result anywhere between a loss of $490 million and a profit of $310 million. This compares to operating income of $260 million last year. Analysts expected the company to guide for operating profits of $354 million.

Amazon.com expects to take a $290 million charge related to stock-based compensation and amortization of intangible assets, among others.

Valuation

Amazon.com ended its third quarter with $5.3 billion in cash, equivalents and marketable securities. The company operates with $2.7 billion in long term liabilities for a net cash position of $2.6 billion.

For the first nine months of 2012, Amazon.com generated revenues of $39.8 billion. The company reported a net loss of $137 million, or $0.30 per diluted share. Full year revenues could total $61 billion, while the company is expected to report a small full year loss.

The market currently values Amazon.com at around $100 billion. This values the company at roughly 1.6 times annual revenues.

Investment Thesis

Year to date, shares of Amazon.com have risen almost 30%. Shares rose from $175 in January to a peak of $264 in September. Shares have sold off some 15% in recent weeks, now trading hands around $222 per share.

Over the past five years, shares have risen some 150%. Shares fell from levels of $80 at the start of 2008, to lows of $40 later that year. Shares steadily rose to levels around $222 at the moment. Between 2008 and 2012 the company more than tripled its annual revenues. Annual revenues rose from $19.2 billion in 2008, to an expected $61 billion in 2012. The company has been profitable in each year since 2008, but is expected to report a small loss in 2012.

The company reported its first quarterly loss on Thursday since 2003. CEO Bezos continues to "invest" in the company by opening 19 new fulfillment centers across the globe. Furthermore, investments on technology and content spending remain high. Amazon.com furthermore extended its offering of Kindle's devices. It now offers models as cheap as $69 for the standard models, to highs of $599 for the most sophisticated devices.

While today's results are not very impressive, and the outlook is soft, I do not think the company is a convincing short. Many bearish investors point towards the high price-earnings ratio and uncertainty about tax claims as negative points. I think concerns are overdone. I refrain from taking a long position as I find it difficult to judge the potential for future profits. I remain on the sidelines until I get better visibility for the arguments of either the bull or bear case.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.