Amazon misses at 3Q earnings but invests in long term growth

Yesterday Amazon posted disappointing results in their 3rd quarter earnings report. Amazon’s shares fell 12% in  trading yesterday.  Amazon’s net income in 3Q 2011 fell 73% compared to the 3Q in 2010. But Amazon’s sales revenue in 3Q increased 44% or 10.88 billion up from 7.6 billion in 3Q 2010 .

The large gap separating Amazon’s top line from their bottom line can be explained by Amazon’s strong commitment to spend aggressively with their core infrastructure and new products. Amazon CEO Jeff Bezos has a proven track record of using shareholder wealth to expand Amazon’s long term reach in e-commerce and technology rather than simply focusing on short term quarterly gains. When Amazon’s Kindle was first released, Amazon operated on extremely thin margins as the company sought to expand their market share in e-reading.

Although Amazon is the world’s largest internet retailer, the company is ambitiously seeking to increase the company’s profit margins by directly competing against tech giants such as Google and Apple for market share with tablets, apps, and video-music content. To compete with those tech giants, Amazon has to spend their shareholder wealth to pursue their long term growth plans.

Amazon’s overall spending increased in 3Q 2011 from 2.5 billion compared to 2.2 billion in 2Q 2011. Shipping expenses accelerated to $918 million due in part to the growing numbers of Amazon Prime members who receive discounted prices for their e-commerce spending.

Amazon also spent money on 17 fulfillment centers, Chief Financial Officer Thomas Szkutak said during yesterday’s conference call. Besides spending on their e-commerce operations, Amazon is spending money on new Kindles.

On November 15th Amazon will begin selling their Amazon Kindle Fire, a 7 inch touch screen color tablet. A week later the company will also release two new touch screen Kindle e-readers. Amazon is undertaking aggressive pricing with the Kindle Fire priced at $199.00 compared to the lowest priced I-Pad at $499.00.

Although there was no mention about the  number of pre-orders for Amazon Kindle Fire at yesterday’s conference call, the company is expecting strong sales heading into the holiday season.  However, the company won’t make money on the Kindle Fire tablets and are projected to lose approximately $10.00 per tablet.

Amazon is betting big there will be a strong and viable market for the Amazon Kindle Fire, a small tablet that  is half the price of the I-Pad but has fewer “bells and whistles” such as a built in camera and microphone. The Kindle Fire comes Wi-Fi connectivity and runs on Amazon Silk, a web browser powered by Amazon Web Service that can track usage and assist Amazon consumers with spending purchases to generate more interest in Amazon products such as Amazon Prime. All of the Silk browser sub systems are present on each Kindle Fire tablet as well as on the AWS cloud computing platform.

Amazon will continue spending for content during the 4Q quarter as they seek to purchase more content such as music and videos. Amazon plans to compete directly with Apple’s I-Tunes for greater market share. They will also compete against Netflix and Hulu with their Amazon Prime and instant videos.

Competing against Apple and Google  in the technology sector is not a zero sum game with one clear winner because future growth is expected to expand in future quarters across many tech platforms.

Amazon’s Forecast for 4Q

Due to Amazon’s increased spending plans, their operating margins will be razor thin in 4Q. Estimated income is  expected to range between -200 million to 250 million which is a decline compared to 3Q 2010. Sales revenues in 4Q are expected to fall between 16.45 billion and 18.65  billion, a notable increase from 4Q 2010.

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