Amazon Profits Tumble while Awaiting Long-Term Bet

Amazon announced its fourth-quarter results yesterday, showing lackluster profits and weakened guidance for 2012, but the company assures that it’s all part of the long-term plan.

Amazon’s fourth-quarter revenue rose $17.43 billion, up 35 percent. While this seems like a lot in retail, the company is in many ways pitted against Apple, which just went gangbusters two weeks ago. Measured in these terms, anything short of phenomenal revenues was destined to start investors squirming.

The company’s shares dropped 10 percent in after-hours trading.

Adding to the company’s hardships were a $558 million loss for Living Social, weak video game sales, and poor projections for the coming quarter. Amazon, in fact, warned that it could lose money in the coming quarter: its operating income projection ranges from $100 million in profits to $200 million losses.

Yet despite these setbacks, the company’s executives remain optimistic for its future. CEO Jeff Bezos and CFO Thomas Szkutak both maintain that this part of the company’s long-term bet.

“We’d rather have a very large customer base and low margins than a smaller customer base and higher margins,” Bezos, said in a recent interview with Wired magazine.

True to that statement, Amazon’s fourth-quarter revenues landed right in the middle of the company’s fourth-quarter guidance, made back in October. The company predicted revenues between $16.45 billion and $18.65 billion, and its revenues landed at $17.43. In the same quarter, Amazon actually beat its own conservative profit guidance: it predicted profits between a loss of  $200 million and to a gain of $250 million. Profits landed at $260 million.

This guidance is set in contrast to the street’s, which was bullish because of high estimates in high sales of Kindle devices. When Amazon fell short of the street’s bullish guidance, and when it fell way behind Apple’s blockbuster quarter, that’s when investors began to feel uneasy.

Additionally, Bezos and company have been touting this long-term plan for several years now, so coming off such high sales numbers the expectation was that the bet was finally paying off.

The problem is that in tech, people expect bets to pay off quickly. Long-term for Amazon, however, looks to be a matter of several years.

Take, for example, the huge Kindle Fire bet. Amazon sell each device at a loss. As in, it takes more money to make, market, and distribute each Kindle Fire than Amazon gets back. Each Kindle Fire, however, is a new window unto Amazon’s goods. In the long-term customers will use these Kindle Fires to purchase more goods than ever before.

It makes sense: Amazon sells an estimated 6 million Kindle devices in the fourth-quarter, each at a loss. People have not had time to use them to buy things. But they will.

And that’s when Amazon wins.



One Response to Amazon Profits Tumble while Awaiting Long-Term Bet
  1. johnantony
    February 2, 2012 | 1:18 am

    Good know about the Amazon’s fourth-quarter revenue rose $17.43 billion, up 35 percent.

    cherrs(the COMODO User)