Amazon Projects Spending That Concerns Those Watching Profit

EghtesadOnline: Amazon.com Inc. will spend big in the coming months on warehouses, movies, gadgets and growth into India, renewing investor concerns that Chief Executive Officer Jeff Bezos cares more about generating revenue far in the future than turning a profit now.

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04 February 2017

The company will double-down on its delivery system that gets products quickly into the hands of its customers. It will keep investing in original movies and shows to encourage people to buy Amazon Prime memberships, which makes them loyal shoppers. It will enhance its hot-selling Echo voice-activated personal assistant to gain a presence in homes. And it will keep pushing into India, which it sees as a vast frontier for e-commerce growth.

All those initiatives will crimp profits. Operating income in the current quarter will be $250 million to $900 million, less than a year ago even though revenue is forecast to increase as much as 23 percent to $35.8 billion, Bloomberg reported.

“When you see revenue go up and earnings go down, it spooks people,” said Michael Pachter, an analyst at Wedbush Securities. “It’s called negative leverage and the street hates it.”

The spending outlook took the shine off profit in the holiday quarter that beat analysts’ estimates. Net income was $749 million, or $1.54 a share, the Seattle-based company said Thursday in a statement. Analysts estimated profit of $1.36 a share.

Holiday Expectations

Investors had high expectations for the fourth quarter, driving Amazon’s stock up more than 10 percent to $839.95 in the month before Thursday’s earnings announcement. Shares declined as much as 4.3 percent, the most in almost three months, to $804 in New York Friday.

People shouldn’t be surprised -- Amazon’s expenses have eaten up sales often as the company built itself into the world’s biggest retailer, said Josh Olson, an analyst at Edward Jones & Co.

“They’re in investment mode again,” which means earnings volatility in 2017, Olson added.

Amazon spent $5.7 billion storing, packing and delivering online orders in its busy holiday quarter, up 26 percent from a year earlier. Technology and content spending increased 27 percent to $4.5 billion.

The company also announced Monday it would build a $1.49 billion air hub near Cincinnati to accommodate its growing fleet of cargo planes. The hub and planes make Amazon less reliant on United Parcel Service Inc. and FedEx Corp. and complement its network of warehouses around the country.

Future Payoff

Amazon will continue such investments to increase the value of its $99-a-year Prime membership, Chief Financial Officer Brian Olsavsky said. Spending on video content pays off by helping attract new customers and investments in logistics generate more volume and greater efficiency, he said.

“Tens of millions” of new members joined Prime in 2016, Bezos said in a statement. Prime had an estimated 65 million U.S. members at the end of September, according to Consumer Intelligence Research Partners. The company doesn’t disclose statistics for Prime, which gives members free, fast delivery of items ordered on the website and access to Amazon’s video and music services.

Revenue increased 22 percent to $43.7 billion in the fourth quarter compared with analysts’ estimates of $44.7 billion. Foreign currency changes reduced sales growth in the period by 2 percentage points, the company said.

Amazon Web Services, the company’s fast-growing and profitable cloud-computing segment, has helped subsidize Amazon’s retail and entertainment ambitions. But fourth quarter revenue of $3.5 billion, up 47 percent from a year earlier, was light due to price reductions, said Ron Josey, an analyst at JMP Securities.

Expectations for holiday sales were too high given the company’s dominance in e-commerce, said Vic Anthony, an analyst at Aegis Capital Corp.

“Amazon stock tends to get bid up over the euphoria of retail shifting online during the holiday shopping season, and now it’s taking a little breather,” he said.