Amazon.com misses, but we have seen this before.

Yesterday we had disappointing results come out from one of our recommended technology stocks in New York, Amazon. The online retailer posted a 73% drop in third quarter profits mainly because operating margins were hurt by big capital expenditure in warehouses, data centres and digital content offerings. Even though quarterly sales were up 44%, this was overshadowed by analyst earnings expectations of 24c compared to the actual earnings of 14c. Understandably the stock has tumbled 11% post the market close.

The numbers need a closer look however and although there was an earnings miss the main reason for the drop in price was actually the guidance for the next quarter which was to be impacted by the introduction of the new Kindle Fire which is being sold at a loss. If you remember, last month I did a review on the product and from what the company has said about it, the hardware is not there to make a profit. Sounds crazy right? No. They make the hardware extremely affordable so that people who buy the product use it as a gateway to Amazon's real business and that is the online retailing, streaming, books, music and the cloud.

This is why most analysts focus on sales growth when it comes to Amazon who are an extremely fast growing tech company that looks to change the face of retail. And sales growth was up 44%. I do understand why the market has reacted the way it did. The company trades on extremely demanding multiples and expectations are high. Expected earnings for the year come in at around $3.50 a share while the stock trades at $200. That gives us a PE of 57. Investors are obviously getting impatient and another soft quarter is not acceptable.

That is not the way I see it however. Patience is key with a company like this. How can you blame a company for making big investments which compromise margins in order to grow in the long run? Especially for a company which seems to be in its infancy in terms of development. The avenues open to Amazon seem endless and once everyone has a kindle the results will come. Remember the FedEx report that Sasha wrote about yesterday? The national retail federation expects to see $465 billion of sales in the last 2 months of the year which is a 3% increase from last year. But FedEx themselves expect a 12% increase in deliveries. Why is FedEx so much more than the increase in overall sales? This is because people are shifting to online retailers and getting the goods delivered. Amazon sits at the forefront in the shift of the way we consume.

I guess it again comes down to that yearn for instant gratification. Maybe companies should stop reporting quarterly, it just fuels our impatience. As long as sales are growing at fantastic levels I am happy to accept reinvestment into capital. We see this drop as a good buying opportunity.