# Amazon's quarterly income fell 73 percent.



## Philip Chen (Aug 8, 2010)

Amazon's third quarter net income fell 73 percent. It has been explained that Amazon is expanding its service operations.

However, my guess is that we might see a tightening of Amazon's pricing model to limit such things as "free" books.

Link


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## tim290280 (Jan 11, 2011)

Philip Chen said:


> Amazon's third quarter net income fell 73 percent. It has been explained that Amazon is expanding its service operations.
> 
> However, my guess is that we might see a tightening of Amazon's pricing model to limit such things as "free" books.
> 
> Link


I had a look at the announcement and it sounded like they had spent big to get the new Kindles (etc) launched before Xmas. Apparently smart investors aren't worried as their sales are up and the trend looks huge for the Xmas period.

Still can't understand why the report sounds so ominous, the share price tumbled, and yet the sales reports look fantastic. They spent extra money in comparison to the Sept quarter last year, the share prospects are still very positive, are traders really like those falling goats that can't stand to be startled?


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## Philip Chen (Aug 8, 2010)

I hope that both of you are right and that Bezos is a forward thinking guy who has a steady hand on the tiller.  My experience with publically traded companies does not give me much comfort, however.  Shareholders, particularly large institutional shareholders tend to only think in 3 month increments.  Amazon might be able to get away with one quarter down, but it will need to show results in the fourth quarter.


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## Monique (Jul 31, 2010)

Here's a Forbes article addressing that issue and possible reasons why the stock fell:

http://www.forbes.com/sites/timworstall/2011/10/26/amazon-invests-more-and-the-stock-falls-it-shouldnt-be-this-way/

Lots of people feel AZ is a fantastic company, but currently over-valued.


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## marshacanham (Jul 30, 2010)

Well, the stock price dropped $27 overnight, but at $200/share it's still too rich for this pennytrader. LOL

I seriously doubt they're in any kind of financial trouble. Launching the Fire and other two new Kindles must have taken quite a bite out of their capital, and I have no doubt they'll earn it back 20 times over.


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## David &#039;Half-Orc&#039; Dalglish (Feb 1, 2010)

And then they'll release sales figures for the Fire, the new Kindle Touch, plus massive Christmas sales, increased overall sales, along with a huge growth in their video and music service, and the stock will go back up. But yes, big zomg because a big company spent money to try and get bigger. Talk about being short sighted.


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## JoshuaPSimon (Jun 24, 2011)

I'm with everyone else.  This is nothing to be concerned about.  A complacent company is a dying company and Amazon is far from complacent.

I'm looking forward to seeing 4th quarter sales figures.


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## PhoenixS (Apr 5, 2011)

Keep in mind that "service operations" are probably more around its cloud services offered to businesses. These services require massive server farms in low-cost countries. Amazon is building data centers in China and Australia and likely expanding its European operations to accommodate new online stores in those areas as well as to service its business customers. That requires an outlay of upfront cash and credit that's a one-time hit on the books. Since it's organic growth, the cost comes out of profits.

Not everything is to do with books where Amazon is concerned .

But here's a book-related example: Say you're selling a book in 2011. You've paid for its editing and cover and you've made a net profit after those expenses of $100 in November. You're finishing up a second book and have had to pay $200 for editing and cover in 2011 but you don't launch the book until 2012. You have $100 profit but have to take the $200 expense hit, so you're at -$100 for the year even though you've got $100 in proceeds to the good. January comes and you recoup your expenses on the second book and your first is gaining even more sales. By February you're at $200 in profit with no expenses being counted against you. You've doubled your profit and are far in the black in 3 months even though you were showing a loss in November. It's all timing when you're trying to determine the financial health of a company.


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## Philip Chen (Aug 8, 2010)

Most of my adult life has been spent as an investment banker.  The description of traders as goats, or more accurately lemmings, is scary, but true.  I often gave talks to audiences encouraging them to be the lemming who waves others on, than the lemming trying to beat the pack to the cliff.

Truth be told, the idea of lemmings rushing blindly to their death is an urban legend.  However, the fact that traders will react on wscant rumor in selling off their position is unfortunately not an urban legend.


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## David &#039;Half-Orc&#039; Dalglish (Feb 1, 2010)

Phoenix, much sense as it makes, it won't stop all the articles that'll hit in the next three days talking about whether or not Amazon is losing its grip on the market, or stockholders will soon be rebelling, or that ebooks are costing them money, etc.


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## Adam Pepper (May 28, 2011)

Sounds like a great time to buy some Amazon stock while everyone panics and sells!  (Sorry...am I on the Bloomberg News website?)


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## David &#039;Half-Orc&#039; Dalglish (Feb 1, 2010)

The key thing is pretty simple: their actual sales grew. Yes their costs went up a ton, but they're one time. But their actual sales grew. But instead of subject titles like "Amazon continues to show growth in gross sales" we get "Amazon's quarterly income plummets three quarters!" Forget boring, basic, slow growth. We like panic!


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## PhoenixS (Apr 5, 2011)

Half-Orc said:


> Forget boring, basic, slow growth. We like panic!


I suggest towels all around.


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## Terrence OBrien (Oct 21, 2010)

_"Still can't understand why the report sounds so ominous, the share price tumbled, and yet the sales reports look fantastic."_

Stock price fell because the price was based on the expectations. Amazon missed the expectations, so the price settles in line with actual, rather than expected results. Also, the company warned of a Q4 loss.

So yesterday's stock price close of $227.15 was based on expectations of a quarterly EPS of 24 cents. 
The lowered stock price is a closer match to the EPS 14 cents they actually reported. This is normal for stock prices vs expectations vs actuals. Trading $201.88 @ 1251 EDT.

However, more important is the guidance they offered which warned of a $200 million Q4 loss due to investment in the Fire.

Keep in mind that if the Fire is selling below cost, that will be a drag on profits for every Fire sold. The loss will be recognized in the quarter the sale happens. At the same time, one can make a case every Fire will increase eBook, media, and merchandise sales, but increased sales are likely to lag the Fire sale.

As Mod mentioned, revenues for Q3 were up 44%.

If we are going to take traders to task for lemming like behavior in selling the stock, is it reasonable to ask if the stock is over valued because of similar lemming like behavior in bidding it up from $106.01 on 29Jun10 to $246.71 on 14Oct11?

So, as a trader sitting in front of six screens at the moment, can some author tell me at what price Amazon should trade right now? (Dollars and cents, or a tight range will do.) I can use all the help I can get, and the last thing I'll do is tell the other lemmings I hang with.


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## David &#039;Half-Orc&#039; Dalglish (Feb 1, 2010)

Terrence OBrien said:


> So, as a trader sitting in front of six screens at the moment, can some author tell me at what price Amazon should trade right now? (Dollars and cents, or a tight range will do.) I can use all the help I can get, and the last thing I'll do is tell the other lemmings I hang with.


Not going to pretend at all I know what it *should* be. I'm just grumbling about the sure-to-follow doom and gloom website articles that will follow.


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## JRTomlin (Jan 18, 2011)

modwitch said:


> The relevant word here is *net*. Total sales increased, but they're spending lots of money. That's a choice, and I suspect a very smart one. Amazon has always done this - traded off short-term gains for long-term dominance.
> 
> We might see them limiting free books in future, or not, but I doubt this will be the driver. If free books, like cheap Kindles, help them acquire and lock in more customers, then they may well increase the supply. Amazon's not hurting financially - this would be like looking at the guy building a mansion down the road and saying "hey, his bank account is kinda small right now."


Yeah. As usual the witch hit it.

There will be doom and gloom and lots of "serves evil Amazon right". I've even seen some of it already, but Amazon's sales are very solid, more than solid, and that's what counts.


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## Damon J Courtney (Jun 9, 2011)

Not only did they roll out a ton of cash to get the new Kindles off the ground, but it's also widely reported (and pretty well accepted) that they're going to lose money on every Kindle Fire they sell.  They have to build up marketshare, and Amazon is ever the king of the loss leader.  They're going to sell a ton of Fires this Christmas, and their outlook shows it.

They'll take a big loss from the sales of the Fires themselves (estimates put it between $10 and $50 per unit), but they're hoping that all those new owners will turn around and give it all back in movies, music and, to a lesser degree, books.

EDIT:  Uh... What Terrence said up there.


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## R. M. Reed (Nov 11, 2009)

Doesn't anyone remember that Amazon didn't make any money for years after it started? There were a lot of jokes about it, and people saying that online retailing would never catch on, that Bezos was crazy, etc. I think he has proven that he can play the long game, even if investors want instant results.


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## kellymcclymer (Apr 22, 2010)

JRTomlin said:


> Yeah. As usual the witch hit it.
> 
> There will be doom and gloom and lots of "serves evil Amazon right". I've even seen some of it already, but Amazon's sales are very solid, more than solid, and that's what counts.


I'm soooo glad to see other people on this forum get it! Amazon's net sales increased by 3 billion (with a b) -- from 7ish billion to 10ish billion. They're just spending a lot on infrastructure (not just the fire, the publishing program, but warehouses, etc.). Basically, Amazon is providing jobs as it grows (unlike many other billion dollar businesses. What part of that is bad? Were they supposed to sit on their billions to make their "profit" look great, or were they supposed to build their business for the future?


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## TessM (Oct 18, 2011)

God forbid a company actually reinvest their profits back into itself. Ugh...most days I hate stock brokers (and I have a friend that is one).


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## ashel (May 29, 2011)

R. M. Reed said:


> Doesn't anyone remember that Amazon didn't make any money for years after it started? There were a lot of jokes about it, and people saying that online retailing would never catch on, that Bezos was crazy, etc. I think he has proven that he can play the long game, even if investors want instant results.


Good news! There's a Futurama joke about Amazon stock, circa 1999, that hasn't aged well.

Everything else about that series is awesome.


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## Terrence OBrien (Oct 21, 2010)

_"Were they supposed to sit on their billions to make their "profit" look great, or were they supposed to build their business for the future?"_

Amazon doesn't pay a dividend, so in a sense it does sit on those profits. Companies that don't pay dividends have to do something with the money. They usually invest it in their own business. People who invest in that kind of firm think the firm can make more with the profits than the individual investor could make by investing his dividends.

Firms that operate like this usually have more volatile share prices because all the profit of the company is tied up in the company. None has ever been distributed to stockholders. Hence the only way to realize a profit is by selling the stock. Many people who owned the stock for the last year were quite happy to sell and take a 100% profit. (Profit for any individual depends on when he bought the stock.)

Holding onto past profits does not have any effect on the profits from the current period. Those are determined by the activities of that period, not from accumulated past profits. Those past profits make the balance sheet look better since it reflects the financial strength of the company, but they are not part of current profits.

So nobody is upset because Amazon is reinvesting its profits. That's what it has always done. Apple does the same thing, and that's what Microsoft did for a long time. This is just normal trade activity.

Here are the quarterly EPS (Earnings Per Share) for Amazon for the past five years. The current quarter (2011 Q4, shown on the table as NMF) is the first one for which they have forecast a loss. That's a big deal. They took a big gamble, so risk of holding the stock increases. (The EPS figures are dollars /share.)

Year Q1 Q2 Q3 Q4 Tot
2011 0.440 0.420 0.140 NMF 1.000 
2010 0.660 0.450 0.510 0.910 2.530 
2009 0.410 0.320 0.450 0.850 2.030 
2008 0.340 0.370 0.270 0.520 1.500 
2007 0.260 0.180 0.190 0.480 1.110

Amazon stock was selling at $40 in Nov08. If we look at a chart we can see it has been running up a channel since that time. This is the fifth time it has touched the bottom of the rising channel since then. One other time, it penetrated the bottom by $16. That was July 2010 when it dropped to $106.


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## Nick Wastnage (Jun 16, 2011)

Adam Pepper said:


> Sounds like a great time to buy some Amazon stock while everyone panics and sells! (Sorry...am I on the Bloomberg News website?)


I agree. Going to try for some on Monday. Amazon haven't failed yet. They've always had an ambitious plan, which they've achieved in all cases. They're set for good Christmas: new devices and a continual surge in ebook sales.


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## Terrence OBrien (Oct 21, 2010)

_"The problem I have with this kind of analysis is that it works decently well for companies that behave the way analysts expect them to. Amazon often makes out-of-the-box choices. People assume this number falling is a big risk. I'd argue that the bigger risk would be *not* taking it, but that requires a longer term perspective."_

There is no shortage of people with a long term perspective, nor is there any virtue in a long term perspective when one's goals are for a shorter term. It doesn't matter if a company is in or out of the box. The history of Amazon is no secret.

But talking about the requirement for a long term perspective tells us nothing about what the price of Amazon should be today. Was the Oct27 close of $227 the right and proper price for Amazon as determined by those with a longer term perspective? Was the Oct 28 close of $198 the wrong price? How about the Oct 28 close up of $217?

Friday's close at $217 is where the company was trading in July 2011. On Aug22 it closed at $177.

So, from a longer term perspective, exactly what price should Amazon trade at on Monday, Oct 31? And maybe a hint about earnings for 2012Q1? Like I said, I can use all the help I can get.


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## Terrence OBrien (Oct 21, 2010)

_"Owning their stock might be riskier, but that would be due to the behavior of people who buy and sell stocks, rather than because the company is in fact in a riskier business position this month."_

Owning their stock is riskier because they put great deal of money into a venture which carries risk. The outcome is uncertain. The initial effects of that risk are reflected in the Q3 results and the Q4 guidance. Q3 actual results are at odds with the company's own Q3 guidance. Something happened that Amazon didn't expect. That's risk.

And risk due to behavior? There is certainly risk due to trading behavior. There is also risk due to buying behavior by consumers. And there's risk when management behavior misses its own guidance by so much.

All this is normal stuff.


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## Terrence OBrien (Oct 21, 2010)

I don't now which is riskier. That's the nature of risk. But the choice isn't between investing in a new Kindle vs keeping monthly numbers up. It's investing in a new Kindle vs all the other things one might do with the money. Monthly numbers are the result of the choices, not the choices themselves. The choice of investment avenue has to stand on its own.

And leaching money long term because one didn't invest in a new Kindle? That's not the choice. The choice is picking the best and most profitable option for long term investment. It's not an easy task and is full of risk. They are also putting lots of capital into distribution centers. 

They didn't tell us why they missed their numbers. I'll poke around and see what I can find. That adds to risk. I presume it took quite a bit of money to get the Fire out. However, it's a bit curious. Much of the investment in Fire would be capitalized. The sales will start being recorded in Q4. Capital investment doesn't reduce earnings in the quarter it happens. Expenses do that. So have margins shrunk? More questions. More risk.

I don't know if something bad happened. What we do know is Amazon was wrong in its expectations for Q3 results. Amazon guidance isn't the aggregate of people's expectations. It's what Amazon itself says. That's risk. We know they are forecasting a possible loss for Q4. Their guidance ranges from ($200m) to $250m. That's uncertainty. A big uncertainty. Uncertainty is risk. Given that, it's reasonable to question 2012Q1. More risk.

It's quite possible Fire is only responsible for part of the downturn in profits.

Amazon remains a great company and I expect it to do quite well. (I bought last week at $206.) But it's reasonable that people will assign varying amounts of risk to its ventures. As information becomes available, and as events transpire, ownership adjusts to reflect expectations. There is nothing in the last week's Amazon trade that is at all unusual for either Amazon or many other companies. Amazon doesn't merit any special treatment. They are big boys and can handle it.


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## Terrence OBrien (Oct 21, 2010)

The decisions were made months ago, but we are now beginning to see the results of their execution. We don't know the details of many of those decisions. For example, does anyone know how much Amazon is subsidizing each Fire? I don't know. I have seen speculation, but the range of that speculation is pretty wide.

So I would agree that nothing material happened in the last week. But the knowledge we have today is significantly improved from what we knew last week. That knowledge is a factor in investors' and traders' evaluation of risk. Risk then is reflected in trading action. 

Stockbrokers? A vanishing breed. Computers have made much of what they did obsolete. I was a floor trader and used to stand in a pit pushing and shoving a bunch of other traders. Today you could shoot a shotgun through there and nobody would notice. It's all moved to electronic trading. One of the more interesting things to watch is how similar the discussion of the publishers' situation is to the discussions that took place a few years back about the trading floors' situation.


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