Investors shrug off weak earnings report from Amazon

New York TimesJanuary 29, 2013 

Amazon sold many more things in the fourth quarter while barely bothering to eke out a profit.

Revenue went up 22 percent to $21.27 billion, while earnings per share fell to 21 cents from 38 cents in the fourth quarter of 2011.

In both cases, the numbers were less than expectations. Analysts had predicted revenue of $22.2 billion and 27 cents a share.

Despite this apparent bad news, investors were unfazed. The stock rose $24 a share, or 9 percent, in after-hours trading.

“We’re now seeing the transition we’ve been expecting,” Jeff Bezos, Amazon chief executive, said in a statement. “After five years, eBooks is a multibillion-dollar category for us and growing fast – up approximately 70 percent last year. In contrast, our physical book sales experienced the lowest December growth rate in our 17 years as a book seller, up just 5 percent.”

By traditional metrics of profitability, 2012 was a poor year for Amazon. The retailer lost 9 cents a share, compared with a profit of $1.37 in 2011.

But Amazon has never been measured in traditional ways. The company has been growing at the furious rate of a startup, more than 25 percent each quarter, despite now ranking among the country’s largest retailers. It makes hardly any money – about half a cent on every dollar. Instead it makes huge investments in infrastructure, selling products from e-books to diapers as cheaply as it can, and then makes more investments to account for the increase in sales.

Customers naturally loved this. What is not to like about free shipping, an Amazon innovation that has become a consumer expectation? But investors, once upon a time, saw this as money going out of their pockets.

“Wall Street gets in a kerfuffle when we lower product prices and invest heavily in the future,” Bezos acknowledged eight years ago. “So don’t buy our stock – instead buy our products and enjoy our investments.”

That would have been a bad idea. The stock is up more than 700 percent since then. Investors have clearly bought into Bezos’ notion that “if we take care of customers, the stock will take care of itself.”

Shares in Amazon, which closed earlier this month at a new record above $280, pulled back slightly before the earnings report. They fell nearly $16 in regular trading Tuesday, to $260.

Jason Moser, an analyst with the Motley Fool site who owns shares in Amazon, said that “many investors, myself included, will more than likely watch this story play out for as long as it takes.”

Moser added in an email message that the market is “betting a lot on what Amazon hasn’t done yet and betting on the fact that it will do it based on what it’s doing now. Kind of a ‘build it and they will come’ sort of thing.”

Recently several states, including California, successfully made deals with Amazon to collect sales tax. This had the effect of raising prices on many Amazon items by more than 5 percent. Land-based retailers, which had agitated for years for such a move, thought this might finally level the playing field.

Their hopes might be misplaced. Any drop in online sales from the collecting of sales tax tends to be temporary, said Scot Wingo, chief executive of Morrisville-based ChannelAdvisor, which helps retailers sell online, including on Amazon.

In California, Wingo said, there was a spike in third-party sales before the tax took effect, as consumer took advantage of the last days of cheaper prices. Then there was a pullback as the tax took effect. Now sales are recovering.

“It’s a little counterintuitive,” he said.

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