Amazon’s Investments Are Piling Up, as Big Losses
By DAVID STREITFELDOCT. 23, 2014
The chickens are not coming home to roost at Amazon just yet, but they are checking the flight schedule to Seattle.
Three months ago, Amazon was expected to lose 7 cents a share in the third quarter. After the retailer warned that it was investing so heavily in so many things, analysts pushed their loss projections up aggressively to 74 cents a share.
Even that was not enough. After the market closed Thursday, Amazon reported that it lost 95 cents a share. There was other disappointing news, too: Revenue came in $260 million less than analysts’ projections, and the company said it might lose money again in the fourth quarter, which in the old days was when retailers made all their profit for the year.
Even revenue growth, Amazon’s powerhouse, is fading a bit. The company said revenue would rise between 7 percent and 18 percent in the fourth quarter. In the fourth quarter of 2013, revenue rose 20 percent from 2012.
Amazon’s story for several years has been that it is growing furiously, investing heavily and postponing profits until the halcyon days just around the corner when it will sell all things to all people all the time. That took the company stock on a wild ride, pushing it up to $400 a share early this year.
But Wall Street has been questioning those assumptions in recent months, and those questions forcefully surfaced again after the earnings report. The stock fell 10.7 percent to $279.75, shaving about $15 billion off the company’s valuation.
The results also indicated that the company’s take-no-prisoners attitude toward its suppliers might be catching up with it.
During the third quarter, Amazon was engaged in a highly public scrap with Hachette, the fourth-largest book publisher, over pricing of electronic books. Amazon is discouraging sales of Hachette books as a way to gain leverage in the confrontation. That in turn has provoked protests from authors and negative publicity for Amazon.
That unfavorable publicity could be having an effect. One particularly weak segment for Amazon in the third quarter was North America media sales, which means books, movies and music. It increased a mere 4.8 percent from 2013.
That was the slowest growth for the category in more than five years and a sharp slowdown from the 13.4 percent increase in the second quarter, said Colin Gillis, an analyst with BGC Partners.
Amazon’s chief financial officer, Thomas J. Szkutak, said in a conference call with analysts after the earnings were released that a shift to renting textbooks rather than buying them and a strong 2013 quarter were responsible for the drop. But Mr. Gillis was unconvinced.
“This was a violent deceleration in growth,” he said. “The controversy with the publisher likely also contributed to the slowdown.”
During the call, the analysts were a bit more restive than usual, questioning when the long-promised payoff for Amazon’s heavy spending would come true. “When things don’t go as anticipated,” one asked, “what’s the process for determining whether to plow ahead or turn back?”
Mr. Szkutak answered that there were “things that go great, and things that don’t go as well as others.”
Here are some of the things that went well. Amazon’s tablet line was refreshed during the quarter to enthusiastic reviews. The dark comedy series “Transparent,” an original production for the Prime membership club, got good notices. Fire TV, introduced in the spring, has turned into a popular streaming box. The grocery delivery service expanded to Brooklyn. Amazon bought Twitch, a popular streaming site, to bolster its gaming opportunities.
On the other hand, the third quarter was marred by the disastrous reception of the Fire phone, Amazon’s long-awaited and much promoted entry into the smartphone market. A marketing survey of 500 Amazon customers could not find any who reported owning a Fire. A great many of the reviews on Amazon’s own site give the Fire the lowest possible rating.
A $200 price cut last month briefly pushed the phone up on Amazon’s list of top-selling electronic products, but it quickly fell off again. Thousands of employees spent years developing the phone. It is a rare case of Amazon completely misjudging the appeal of a new product.
Mr. Szkutak said Amazon had $83 million worth of inventory of the phone at the end of the quarter. That should last until the sun goes dim.
Michael Pachter of Wedbush Securities was a mild dissenter on Amazon before the earnings came out, citing “a variety of customer experience enhancements” that will soak up potential profits. These enhancements include a streaming music service recently introduced by Amazon. It is free for Amazon Prime members.
Spending on video and music content will total $2 billion this year and $2.5 billion next year, Mr. Pachter wrote.
Mr. Szkutak said the free content was doing its job, with customers who used the streaming video feature renewing at higher rates and buying more physical goods.
But if the executive sounded one theme during the call, it was that even Amazon realizes there are limits.
“We’ve certainly been in several years now what I would call an investment mode,” Mr. Szkutak said. “There is still lots of opportunity in front of us, but we know we have to be very selective about the opportunities we pursue.”
For nearly every retailer, including Amazon, the fourth quarter is the biggest. As usual, Amazon gave a wide range for its guidance, saying it might lose as much as $570 million and make as much as $430 million. In 2013, it made $510 million in the fourth quarter.
“I think that the potential for a loss in the fourth quarter is what is freaking people out,” Mr. Pachter said. “It is inconceivable that Amazon would lose money during the holidays, at least to someone who bought the stock above $300.”