Amazon (AMZN) operates as an online retailer in North America and internationally. It announced third quarter earnings on October 25th. The company's revenues came in at $13.8 billion which was a 27% increase from revenues of $10.8 billion in the third quarter of 2011. Net income came in at -$274 million which was down from net income of $63 million in the third quarter of 2011. The company's earnings per share came in at -$0.60 per share which was down from $0.14 per share in 2011.
In addition to the poor third quarter earnings, Amazon predicted a relatively weak fourth quarter. The company expects sales of between $20.25 billion and $22.75 billion, or to grow between 16% and 31% compared with fourth quarter 2011. It expects a fourth quarter operating loss of between -$490 million and $310 million, compared with $260 million in the prior year period. Analysts expected the company to guide for operating profits of $354 million. Other than the 27% revenue increase, the third quarter earnings report seemed pretty poor. But, despite what I would consider to be a poor earnings report, on October 26th, the day after the report, the stock rallied higher by 6.87% on more than 3 times average volume.
Why did Amazon's stock price move higher?
I believe that Amazon's stock price rallied because some investors find it hard to resist investing in companies that have rapid revenue growth and a product or service that is basically unchallenged. Amazon has both of these characteristics; the company had revenues of about $40 billion through the first three quarters and is on track to report revenues of $60 billion to $63 billion for the 2012 fiscal year. This is up from revenues of $48 billion in 2011.
In addition, Amazon has no real challengers to its dominance as an online retailer. That is because it has been able to use "the public cloud to sell more products at a cheaper price than anybody else." Basically the company has used technology to carve out a unique niche for itself in the discount retail marketplace. Amazon's credo is that it "seeks to be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices." It appears that the company has lived up to its credo.
Other discount retailers such as Wal-Mart (WMT), Sears (SHLD) and Target (TGT) have been losing market share to Amazon as a result of its rapid expansion. "A recent survey revealed that as of today, about 50% of Wal-Mart's customers have also shopped at Amazon;" This is a big increase from prior years. Some large retailers are trying to emulate Amazon's business model, but Amazon has had a huge head-start in the online retailing market niche, and it has a competitive advantage because it does not have the overhead cost of brick and mortar stores, and most of its customers do not have to pay sales taxes.
Recent News about Amazon.com:
On October 26th, Google (GOOG) announced that it is throwing its hat into the same-day delivery ring. The search giant, whose e-commerce ad sales are pressured by Amazon's success, has begun a San Francisco trial for a delivery service launched in partnership with retailers (including national chains). eBay (EBAY) is also using San Francisco to kick-start a same-day delivery service. Amazon has said it isn't economical for it to do same-day "on a broad scale," but is spending aggressively to lower delivery times.
On October 26th, Amazon stock price moved higher after missing Q3 estimates and issuing soft Q4 guidance (I, II). The Street priced in some worries ahead of time and could be taking kindly to healthy customer account growth and third-party merchant activity. Nomura's Brian Nowak, who has been bullish for a while, is pleased Amazon's gross margin rose 180 bps but is concerned about still-soaring fulfillment expenses.
On October 25th, Amazon was as secretive as ever during its Q3 call. No comment on which European markets are weak, and no comment on the impact of sales taxes (it now collects on over 50% of sales). Amazon also dodged an amusing question about whether it's made a "philosophical" decision to keep running near breakeven. But, it did note paid unit growth was 39% year-over-year, and active customer accounts rose by 8 million quarter-to quarter to 188M. Gross margin was 25.2%, down a bit from Q2's 9-year high of 26.1%
Amazon is a hard stock to analyze. Over the last 52 weeks, the stock price is up by 11.6% and has been relatively stable as evidenced by its Beta of 0.64. But, on October 26th after what I would consider to be a relatively poor earnings report along with a warning of fourth quarter losses, the stock popped higher by $15.32.
When I try to analyze Amazon's future, I like the fact that it is rapidly growing revenues, and I think that Amazon's CEO Jeff Bezos has a compelling vision which is "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." But, I realize that many investors will avoid the stock because of the company's extremely high valuations (price to earnings ratio 290.2/price to book ratio 13.4), and low margins (operating margin 1.42%/profit margin 1.09%). I believe that before an investor puts money into Amazon they must ask themselves, what is most important: rapid revenue growth or profitability. The last high valued company that I watched that put revenue growth ahead of profitability was Netflix (NFLX), and that stock price has fallen from $300 in July of 2011, to its current price of around $70. I admire Amazon's business model, but with such high valuations and decreasing profits, its stock is one missed revenue estimate away from a serious price correction.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.