As growth wanes, Amazon begins to show Wall Street the money

SAN FRANCISCO Thu Jan 31, 2013 10:37pm IST

A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen in Vienna November 26, 2012. REUTERS/Leonhard Foeger/Files

A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen in Vienna November 26, 2012.

Credit: Reuters/Leonhard Foeger/Files

Related Topics


Rajalakshmi (C), 28, smiles after winning the Miss Wheelchair India beauty pageant in Mumbai November 26, 2014. REUTERS/Danish Siddiqui

Miss Wheelchair India

Seven women from across India participated in the country's second wheelchair beauty pageant, which aims to open doors for the wheelchair-bound in modelling, film and television, according to organisers  Slideshow 

SAN FRANCISCO (Reuters) - After a spending spree in recent years pushed Inc's(AMZN.O) net results into the loss column, investors are betting that the company is tightening the purse strings and focusing on delivering a solid profit.

Investors have watched with growing consternation since 2010, as the world's biggest online retailer spent billions erecting warehouses, amassing computer servers, buying video content and manufacturing tablets. Analysts say Amazon is emerging from that supercharged investment phase just as growth of its core retail business slows.

On Tuesday, it blew past expectations for quarterly operating income and gross margins. That propped up the bull case that the company has put in place many of the necessary pieces to its profit puzzle.

Despite missing revenue expectations for the crucial holiday season, Amazon shares set a record in late trading on Tuesday after the results. The stock was up almost 5 percent on Wednesday and down 1 percent at $270.17 in morning action on Thursday.

"When the investment phase winds down, there will be dramatic room for margin expansion," said Mark Mahaney, an analyst at RBC Capital Markets. "Whether we're at the end I don't know for sure, and the company is not signaling that. But my guess is that we are."

Year-over-year expense growth peaked in the middle of 2011 at 64 percent. In the fourth-quarter of 2012, expenses were up 42 percent compared to a year earlier, according to Matt Nemer, an analyst at Wells Fargo.

Tellingly, fourth-quarter 2012 expenses grew more slowly than gross profits for the first time in 10 quarters, he noted.

"What investors are buying now is the profit that will come as Amazon comes out of its current investment cycle," he said.


What gets Wall Street excited about Amazon is leverage - the word analysts use to describe earnings growth that's possible once a company has finished building a business and is ready to funnel more revenue through it.

"They've made these investments in front of the growth and now they can grow into the infrastructure that they've built," said Steve Weinstein, senior Internet analyst at ITG Investment Research. "For each extra dollar of revenue, the profitability will increase."

Amazon's Kindle e-book business is a good example.

It had to spend heavily to develop software and hardware to make the e-book buying experience quick and seamless for customers. It also had to invest in data centers and lots of servers to process e-book purchases and send digital copies to millions of devices, Weinstein explained.

Much of this leg work was complete and it will cost relatively little to handle higher e-book volumes, he said.

The process may be similar with other Amazon businesses, such as the online marketplace for third-party sellers called 3P, and AWS, which are growing rapidly, Weinstein added.

A comparison of Amazon's North American business with its younger international operations shows the potential for profit.

In North America, operating profit margins reached 9 percent in 2003, but then fell as the company spent heavily to build a big network of fulfillment centers.

Now that Amazon has fulfillment centers closer to more customers, the cost of shipping is falling, boosting profit again. In the fourth quarter of 2012, operating margins were at 5 percent, almost double a year earlier.

"This part of the business could get to 7 percent operating margins in the future," Nemer said.

Amazon's international operations generated operating profit margins of more than 7 percent in 2009, but last year the company barely broke even overseas as the company expanded into new countries such as Brazil and Spain, Nemer said.

"Amazon is investing a lot of money upfront to build new websites and distribution in these countries," Nemer said. "It's amazingly costly and dilutive to earnings initially."

He estimated that older overseas markets such as Britain, Germany and Japan still generate margins of 6 or 7 percent.

Still, Amazon's valuation is a lot higher than other major technology companies, notably longtime investor darling Apple Inc(AAPL.O). That gives some investors pause.

Amazon shares recently traded at a whopping 156 times forecast 2013 profit, while Apple stock sold for just 10 times estimated earnings this year, according to Thomson Reuters data.

But such metrics rely on net income, which for Amazon is depressed by its huge investments in recent years.

"With that in mind, the valuation all of a sudden looks pretty reasonable," Nemer said.

(Editing by Edwin Chan and David Gregorio)



WTO Trade Deal

WTO Trade Deal

WTO clinches first global trade deal in its history  Full Article 

Kashmir Attack

Kashmir Attack

Ten dead in Kashmir's worst militant attack in more than a year  Read 

OPEC Meeting

OPEC Meeting

Saudis block OPEC output cut, oil price sinks further.  Full Article 

E-Commerce Boom

E-Commerce Boom

Online grocers come up trumps in India's e-commerce boom   Full Article 

GDP, RBI Preview

GDP, RBI Preview

GDP growth set to weaken, business wants reforms more than rate cut  Full Article | Related Story 

Jaitley to Rajan

Jaitley to Rajan

Jaitley likely to meet Rajan on Monday to urge rate cut  Full Article 

Banking Sector

Banking Sector

India moves to allow more businesses to offer basic financial services.  Full Article 

Jamini Roy

Jamini Roy

Photo Gallery – Bengali household name Jamini Roy’s paintings  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage