Amazon Kindles Investor Outrage
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The Fiscal Times
February 1, 2012

Investors have a zero-tolerance policy for companies that disappoint them these days, and that’s why they spent much of Wednesday unloading shares of Amazon.com (AMZN) after the company’s lackluster fourth-quarter earnings report late Tuesday. (The shares opened below $174 after closing the previous session above $194.)
 
It’s not so much that the company’s results fell dramatically short of expectations – they didn’t – but that the contrast between higher (but still disappointing) revenues and sliding profits appeared more dramatic in light of Amazon’s somewhat bearish projections for the first quarter. Set against the company’s rather lofty valuation – it still trades at more than 90 times trailing 12-month earnings – the prospect of an operating loss for the current quarter was enough to cause investors to throw up their hands in disgust and walk away from the stock.

It’s hard to blame them. Amazon has always been a big spender, investing in everything from the Kindle and the Kindle Fire to new ways to convince shoppers to spend more time – and money – on its site. But that growth in revenue often has come at the expense of growth in profits, as happened once again in the fourth quarter, when it reported a 57 percent slide in earnings, despite higher revenues. The Kindle Fire appears to be another loss leader (like Amazon Prime, the subscription program through which Amazon customers can get free two-day shipping) that the company believes will generate more in content sales than it loses. That may be a correct assumption, but impatient investors may not want to sit around waiting to find out. Especially in light of a surge in operating expenses, and a decline in operating margins over year-earlier levels.

Amazon is not Apple (AAPL). It has less cash on hand (to put it mildly) and is a retailer, not a manufacturer of some of the most coveted electronic goods on the planet. And with that premium valuation, investors want more insight into the company’s earnings than simply a comment by its chief financial officer, Tom Szkutak, that Amazon is “very encouraged” by the rate Kindle users are snapping up content. The company last month said shoppers had snapped up “well over 1 million Kindle devices per week” throughout the month of December, but it added no new information about sales of its Android-based tablet during its call with analysts Tuesday.

True, there are some encouraging signs for Jeff Bezos and Co. Amazon is faring better than many bricks-and-mortar retailers, which struggled throughout the fourth quarter. Most of them will eke out modest single-digit gains in same-store sales, while Amazon’s growth in revenues remains relatively robust: Excluding currency effects, its net sales surged 35 percent. That’s an impressive result.

Amazon has frustrated and disappointed short-term investors before by investing in long-term success rather than maximizing quarter-to-quarter results, so the battering it took Wednesday is nothing new — and the stock has proven that investors will forgive the earnings blips as they chase big-time growth.
 
But the bottom line is that even if you’re a die-hard Kindle aficionado, or order everything from cat food and garden tools to designer shoes from Amazon, this may not be the time to buy the company’s stock. Amazon may well post respectable results going forward, but investors increasingly are going to be demanding more than that if the stock is to retain its pricey valuation. Until the dust settles – and until the price makes the stock look like something you’d find in a bargain basement rather than a designer boutique at Sak’s – this is a stock you’ll want to avoid.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.