Amazon.com misses on the top line as they sacrifice margins

Yesterday we had numbers from online retailer Amazon which came in way below expectations causing the share to drop 11% in after hour trade. For the record, this is not a macro issue, the demand is there. The issue is coming from the company's huge growth drive at the expense of short term earnings.

Fourth quarter revenue came in at $17.4bn dollars compared to expectations of $18.3bn. Net income fell 57% to $177mn or 36 cents a share. The miss on the top line was the real issue for shareholders. Investors can stomach a PE of over 50 if revenues are growing and those future profits look closer than before. The biggest risk lies with management's decision to pump big capital expenditure with the long term in mind whilst sacrificing current profits.

Remember when I wrote about the Kindle fire? Back in September of last year, the piece was titled: target="_blank">Amazon didn't start the fire, but they are improving on the Kindle The strategy was to sell these devices at almost cost so as to provide a platform for customers to purchase Amazon goods. Naturally this would crimp margins. This is why projections for the next quarter were not great with income ranging between a $200mil loss to a $100m profit. This will be another drop from this quarter's earnings. Another margin cruncher is their unlimited two-day shipping for $79 a year. Sounds too good to be true but again it's a long term view.

So where's the attraction? Firstly let's look at these concerning revenues. Amazon have opened up their platform to third party sellers which has been a huge success. These rose 65% over the festive season and now constitute 36% of all sales. This tactic will increase earnings but decrease revenues because they only take a cut of each sale instead of reflecting the entire sale on their income statement. That was CEO Steve Bezos' explanation.


I'll be honest, my gut feel trusts management here. Steve Bezos is a brilliant man of the Steve Jobs mould. I doubt he cares what the share price does on a quarterly basis because he has a long term plan which fundamentally makes sense. Investors can be very fickle, especially when numbers are released every quarter and such a big thing is made out of it. It really is the long term plan that matters.

These guys have the potential to change the world. In fact they already have and that is why they attract such a high valuation. But I believe that they can change the world so much so that we will look back at our old consumption habits like we now look back at horse carriages for transport. A lot of these tactics seem unconventional and crazy at the time but having read the Steve Jobs book, this is not always such a bad thing. The company is extremely exciting and we continue to like it. It is not for the faint hearted however and it will be volatile. Patience will be rewarded in my humble opinion.