We have an online giant seeing its margins contract as it replaces physical delivery with digital delivery. Revenue’s growing. Profitability’s shrinking. There’s a gasp in the crowd when the dot-com darling reveals that it may post an operating loss during the first quarter of 2012.
Netflix went through this exact painful scenario a couple of months ago, and now it’s Amazon’s turn to fess up the bad news.
A Quarter to Dismember
Net sales climbed 35% to a whopping $17.4 billion during the seasonally potent holiday quarter, but earnings plunged 58% as Amazon sells low-margin Kindle e-readers and tablets and invests in its fledgling digital delivery platforms.
Despite the disparity, it was actually Amazon’s top-line figure that sent bulls scurrying for the exits. Analysts were only banking on a profit of $0.17 a share, but they had expected a heartier $18.2 billion in net sales.
Amazon’s guidance for the current quarter calls for net sales to grow at a 22% to 36% pace, just short of where the pros are perched. Its operating profit range for the current quarter rests between a deficit of $200 million and a profit of $100 million. Even if Amazon has historically been conservative in its guidance, it has to hurt to deliver an outlook when the midpoint calls for an operating deficit.
Amazon didn’t reveal exactly how many Kindles or Kindle Fires it sold during the period, though analysts have been projecting between 3 million and 6 million units of its $199 Kindle Fire tablets cleared during the quarter. This figure clearly pales in comparison to the 15.4 million iPad 2 tablets that Apple (AAPL) sold during the same quarter, but keep in mind that the Kindle Fire wasn’t made available until the middle of November.
Amazon investors have been patient with the leading online retailer since margins first began to deteriorate last year. Everyone understands that Amazon has to practically give its hardware away if it wants to one day reap the chunky profits that are available through the digital delivery of media. If Amazon wants to take on Netflix in premium streaming, it needs to establish the audience of Web-tethered couch potatoes and license the content that folks actually want to watch.
However, an operating loss during this new year’s freshman quarter may be difficult to swallow. Decelerating sales growth will also be a sorry sight for those who have been paying a market valuation premium to own a piece of this dynamic dot-com mainstay.
Mr. Market’s patience is wearing thin. Netflix could’ve probably told Amazon that this would happen, but why ruin the ending. They’re competitors, you know.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Netflix. The Motley Fool owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, and Netflix, as well as creating a bull call spread position in Apple.