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Amazon spending spree may extend well into 2012
January 25, 2012 / 11:28 PM / 6 years ago

Amazon spending spree may extend well into 2012

SAN FRANCISCO (Reuters) - Inc (AMZN.O) is expected to barely make a profit in the crucial fourth quarter and 2012 might not be much better as the largest Internet retailer keeps spending on new ventures, testing the patience of investors.

A box from is pictured on the porch of a house in Golden, Colorado July 23, 2008. REUTERS/Rick Wilking/Files

Amazon, which reports its figures on Jan 31, has been growing at least twice as fast as the e-commerce sector in recent years. To keep up that pace, the company is expanding into new categories and regions, spending heavily on growth and crushing profit margins.

This came to a head in October, when Amazon warned it could suffer a fourth-quarter operating loss of as much as $200 million, sending its shares down more than 10 percent.-

The stock has fallen further since then on concern investments will continue in three main areas: fulfillment centers to support its online retail business; content for video streaming and other media businesses; and technology infrastructure for its cloud computing service.

Then there is the new Kindle Fire tablet, which some analysts estimate is selling at break-even or at a small loss. A new device may be unveiled in 2012 and analysts expect that to be priced aggressively, too.

“Investors want to know that this is a company that’s run to make money,” said Ben Schachter, an analyst at Macquarie. “The hope is that, going into 2012, we won’t be talking about having a negative operating profit number in the guidance again.”


For the fourth quarter, Amazon is expected to make 19 cents a share, down from 91 cents a year earlier, according to Thomson Reuters I/B/E/S. However, estimates range from a profit of 88 cents a share to a loss of 26 cents a share.

Over the past five years, 43 retailers have broken even or lost money at least once in the holiday-season fourth quarter, including Dillard’s Inc (DDS.N), Office Depot Inc ODP.N and Men’s Warehouse Inc MW.N, according to Brian Nowak, an analyst at Nomura.

The average market value of the companies on this list is $650 million, while Amazon worth over $80 billion, he noted.

“It would be strange to add Amazon to it,” Nowak wrote in a note to investors.


Nowak does not expect this to happen in Amazon’s fourth quarter, but is still bearish about Amazon profits in 2012 and 2013.

Most analysts and investors do not focus on Amazon’s earnings per share. They instead follow operating income and consolidated segment operating income, or CSOI, which excludes stock-based compensation and other expenses.

Nowak expects fourth-quarter operating income of $152 million and CSOI of $347 million. Analysts, on average, are calling for operating income of about $90 million and CSOI of $250 million, according to Nowak.

For 2012, Nowak said his CSOI estimate is $1.52 billion, 8 percent below the Wall Street consensus. His 2013 CSOI forecast is $2.01 billion, 24 percent below consensus.

Nowak’s bearish outlook is shared by some other analysts. Aaron Kessler of Raymond James expects Amazon to post an operating profit margin of just 1.9 percent in the fourth quarter.

“We’re not expecting much of an improvement in 2012,” he said, forecasting a 2.4 percent margin in 2012 and a 3 percent margin in 2013. In 2009, Amazon’s operating margin was almost 5 percent.


Shawn Milne, an analyst at Janney Capital Markets, recently cut his 2012 CSOI estimate by $300 million to $1.73 billion and chopped his 2013 CSOI forecast by $783 million to $2.69 billion because he expects Amazon’s investments in digital content and devices to be “longer and deeper” than previously thought.

Amazon is buying movie and TV rights to support its video streaming and subscription services. The company’s LOVEFiLM business in Europe announced three content deals with Disney and UK broadcasters the BBC and ITV recently.

    Milne said Amazon may launch a smart phone in the second half of 2012 and a new version of its Kindle Fire tablet in the first half of the year.

    These devices will be subsidized by Amazon to encourage more people to buy them, Milne added. The company is hoping they purchase more products with the gadgets. This strategy creates higher costs up front in return for higher revenue and profit later.

    Nowak thinks the main pressure on profit margins will come as Amazon keeps building new fulfillment centers to keep up with growing demand from customers of its main online retail business. Fulfillment centers are giant warehouses that Amazon and other online retailers use to store products, ship them and handle returns quickly.

    Indeed, Amazon said this week it will invest $50 million to open a new fulfillment center in South Carolina and recent job listings suggest the company is setting up its first fulfillment center in India.


    Such demand likely fueled a 41 percent jump in fourth-quarter revenue to $18.2 billion, according to Thomson Reuters I/B/E/S. That would out-pace the e-commerce sector, which grew 15 percent during the holiday season, according to comScore.

    “Amazon continues to post very strong numbers, looking at the data that we see directly through our network,” said Eric Best of Mercent, which helps about 400 merchants sell through and other e-commerce websites.

    However, Europe’s struggling economy may keep a lid on growth. EBay Inc (EBAY.O), an Amazon rival that reported fourth-quarter results last week, said Germany was weak, while Google Inc (GOOG.O), the largest Internet search company, saw a slowdown in fourth-quarter ad sales growth in the region.

    “We will have to watch commentary on Europe from Amazon,” said Kessler.

    Amazon gets roughly half its revenue outside the United States and about three-quarters of those overseas sales are generated in Europe, including the UK, according to Macquarie’s Schachter.

    The company has been expanding in the region just as the sovereign debt crisis intensifies. It launched an online retail business in Spain in September and opened Kindle e-book stores in Italian and Spanish cities soon after.

    Reporting By Alistair Barr; editing by Andre Grenon

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