Online giant Amazon (NASDAQ:AMZN) reported another quarter of solid revenue growth masked by subpar profitability Thursday afternoon. Revenue surged 27% year over year to $13.8 billion, just below consensus estimates. Earnings swung to a loss of $0.23 per share compared to a profit of $0.14 last year, on an adjusted basis, which was much worse than expected. On a GAAP basis, the company lost $0.60 per share thanks to recognizing a large loss on deal site LivingSocial. Click here to learn why we think Amazon's $200-plus price tag is justified.
The tech giant continues to focus on taking market share and damaging its competitors rather than generating large profits. CEO Jeff Bezos announced that the Kindle Fire HD, a tablet that sells for approximately breakeven, is the No. 1 selling product on Amazon.com, and it continues to focus on selling hardware for low prices in order to sell content. This would be great, except it seems electronics sales are greatly outpacing media sales growth. Electronic sales jumped 36% year over year to $8.6 billion, compared to worldwide media sales, which grew 11% year over year to $4.6 billion. As a result, operating margins were about -0.002% during the third quarter, compared to 0.007% during the same period a year ago. This compression is reflected in Amazon's free cash flow, which is down 31% for the trailing 12 months year over year. Aside from investments, we think shipping costs continue to weigh on margins, and the rise of Amazon Prime could further aid this weakness.
Without question, the company remains heavily focused on investment, building huge data centers, and making acquisitions. Neither seem to be negatively impacting the North American business, where operating income doubled year over year to $291 million on 33% sales growth. International operations swung to a loss of $59 million, despite 22% revenue growth.
Going forward, the firm painted an uncertain picture, providing fourth-quarter revenue guidance of $20.25 billion to $22.75 billion -- 16% to 30% growth year over year. The firm also forecasts operating income between negative $490 million and positive $310 million, compared to operating income of $260 million during the same period of 2011. We suspect the wide range accounts for the cloudy global outlook, but we think North America, where most income is produced, will outpace the international segment.
There's a good possibility that Amazon doesn't make much, if any, profit in 2012. However, as we've discussed previously, profitability remains a secondary issue for the firm. For the time being, Bezos and company seem relatively satisfied in growing revenues and making new products, with little concern for near-term earnings. Free cash flow should improve if investments turn out to be profitable, but we think the company could remain a low-margin business for the foreseeable future. As a result, we aren't interested in adding shares to the portfolio of our Best Ideas Newsletter at this time. You simply "gotta have faith" to invest in shares.
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.