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Market Loses Patience With Amazon

Posted on Wednesday, Jul 30th 2014

Looks like the market is beginning to lose patience with Amazon’s (Nasdaq: AMZN) loss-making quarters. Amazon continues to invest in new opportunities and report stellar revenue growth, but margins remain elusive, and that is believed to be by design. On the announcement of the results for the recently ended quarter, Amazon saw their stock fall nearly 12% in response.

Amazon’s Financials
Revenue growth for Amazon remains impressive. Second quarter revenues grew 23% over the year to $19.34 billion, marginally ahead of the Street’s target of $19.33 billion. However, the loss of $0.27 per share was significantly higher than the market’s projected loss of $0.16 per share. Amazon attributed the increased losses to investments in new business opportunities and expansion of current offerings.

By segment, revenues from products grew 20% to $15.3 billion and revenues from services grew 39% to $4.1 billion.

For the current quarter, Amazon projected revenues of $19.7 billion-$21.5 billion, marginally ahead of the market’s projections of $20.8 billion. Operating losses are expected to grow significantly from $15 million in the recently ended quarter to $410 million-$810 million.

Amazon’s Growing Portfolio
As part of their drive to invest in newer offerings, Amazon recently launched their mobile phone under the name Fire. The 32 GB no contract phone is priced at $649 and comes with features such as instant access to Amazon’s website including the Mayday button, Second Screen, X-Ray, and new features such as the Dynamic Perspective and Firefly. Dynamic Perspective recognizes the way the phone is being held, viewed, and moved to provide the users with a 3D experience and the Firefly service helps consumers queue products for later purchases and compare prices by recognizing bar codes. Analysts expect Amazon to sell 2-3 million phone units in the US by the end of the year. They believe that the phone is being targeted by Amazon as a tool to drive sales to Amazon’s store and to collect customer data. I am not convinced about buying a $649 phone as a shopping device AT ALL.

Earlier this week, Amazon also announced the launch of a new store targeting 3D printer products. The store will enable consumers with the option to buy from a selection of over 200 unique on-demand products printed using 3D printers. Customer will be able to customize these products by material, size, style, and color variations as well.

Amazon continues to invest in international operations and announced plans to open five new warehouses in India to cater to the growing demands of the region. The new facilities will be opened in Delhi, Chennai, Jaipur, Ahmedabad, and near Gurgaon and will help Amazon provide next day and same day delivery options to these locations. Amazon would need services like these to compete in India where local players like Flipkart are doing well Recently, Flipkart had raised $210 million in funding from their investors to cater to the market.

Within the mobile payments segment, Amazon is rumored to be investing in the development of a mobile credit card payment reader, which is expected to be priced at $10 and will be released later this year. Earlier this month, they had launched a beta version of a mobile payment app named Amazon Wallet. Like other similar services, Amazon Wallet collects the user’s gift cards, loyalty programs, and membership cards on the cloud.

As part of their effort to attract user engagement to their video streaming service, Amazon is also looking to invest nearly $100 million in original content development during the current quarter. The original programming move has delivered good results for services like Netflix and Amazon intends to reap similar benefits. Amazon has noticed that their Prime members are increasing the streaming of free videos online and that is translating to increased purchases of digital videos and other digital content. Last month, Amazon announced its multi-year content licensing agreement with HBO that will make Amazon Prime Instant Video the online-only subscription home for HBO scripted shows like Deadwood, Six Feet Under, The Wire, and The Sopranos.

Meanwhile, Amazon is also facing rising pricing pressure on some of their services. While Amazon is the leading cloud services provider, market reports suggest that Microsoft is quickly gaining share by offering services at a competitive price. Within the cloud, price cutting has been going on since early second quarter. In response, Amazon has already cut prices by up to 50% in some cases. Amazon does not disclose the margin it earns on their Web Service. Many believe that it is already a loss-making venture. The price cuts are not going to bode well for their future and Amazon may need to become more transparent about their numbers if they want the investors to be more understanding. The sector is fast commoditizing, and making money in it will become extremely difficult for any of the players.

Amazon’s stock is trading at $320 with a market capitalization of $147.85 billion. It touched a high of $408.06 earlier this year.

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