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Amazon Aligned With Multiple Major Trends

Posted on Wednesday, Feb 2nd 2011

ComScore holiday sales estimates show that overall online retail sales in the U.S. grew 12% over the year to $32.6 billion for the two-month period of November and December. For the holiday season, e-tailer Amazon saw record sales on Cyber Monday, with 13.7 million items sold worldwide; this translates to 158 items sold per second. The numbers were 44% higher than the previous year’s record holiday peak day sales of 9.5 million items, or 110 items per second. Meanwhile, for the current year, market researcher Forrester estimates e-commerce spending growth to continue at 12% to $197.3 billion.

Amazon’s Financials
Amazon’s (NASDAQ:AMZN) Q4 revenues increased 36% over the year to $12.95 billion, missing the Street’s projected $13.01 billion target. EPS of $0.91 was higher than the previous year’s $0.85 and managed to beat the market’s expected $0.88.

Revenues from the U.S. and Canada increased nearly 45% over the year to $7.21 billion, and international revenues grew 26% to $5.74 billion. Worldwide media revenues grew 12% over the year to $5.23 billion, while worldwide electronic and other general merchandise sales grew 60% to $7.39 billion.

Revenues for 2010 grew 40% to $34.20 billion. EPS of $2.53 was also significantly higher than EPS of $2.04 reported a year ago.

For the current quarter, Amazon projects revenues of $9.1 billion–$9.9 billion, compared with the market’s estimate of $9.3 billion. However, projected operating margins of 2.9%–3.9% are significantly shy of the market’s 5%. Amazon attributes the reducing margins to heavy spending on building technology and fulfillment infrastructure.

Amazon’s Kindle
But, analysts believe that rising Kindle sales may be hurting the company’s margins. According to market research firm iSuppli, the material cost of producing the 3G Kindle is estimated to be $155.56. Add to that the cost of software, licenses, royalties, and manufacturing expenses, and Amazon will be left with minimal margins since the Kindle sale price is $189.

Amazon remained silent on the number of Kindles sold during the year. They do, however, claim that they have sold more Kindle 3 units than the final book in the Harry Potter series, making the Kindle their biggest-selling product. Market researchers estimate that Amazon sold nearly 8 million Kindles in 2010 and project it will sell another 12 million this year.

To make Kindle sales profitable, Amazon is focusing on e-books. Kindle e-book sales have overtaken paperback sales: According to Amazon, they now sell 115 e-books for every 100 paperbacks sold. Amazon claims to have 810,000 titles in the Kindle e-book store.

Amazon is also expanding the Kindle apps portfolio. They launched a Kindle app for Windows Phone 7, in addition to the Kindle for Android app that was updated to let users buy, read, and sync more than 100 Kindle newspapers and magazines. The Kindle apps now let users “Buy Once, Read Everywhere” on Kindle devices and iPad, iPod Touch, iPhone, Mac, PC, BlackBerry, and Android-based devices.

Amazon’s International Expansion
As part of their international expansion plans, Amazon recently launched an Italian-language website, Amazon.it. Like the parent site, Amazon.it offers a large selection of books, DVDs, video games, music, and consumer electronics at low prices. The site also includes their membership program, Amazon Prime.

The company also acquired LOVEFiLM, a UK-based DVD and games rental provider. Amazon already owned a 42% stake in the company and bought the remaining 58% stake for $320 million. LOVEFiLM has a subscriber base of 1.25 million across Europe and is estimated to have revenues of £97 million (~$154 million) in 2009 with earnings of £9 million (~$14.3 million).

Amazon Expands Service Offerings
Amazon is also expanding into other services and recently launched new cloud-based services that include an e-mail service called Simple Email and a cloud computing service called Elastic Beanstalk.

Simple Email is aimed at bulk and transactional e-mail and will cater to the infrastructure requirements of developers and businesses that need to send big batches of e-mail by using an API rather than setting up their own internal e-mail servers or contracting with third-party providers.

Elastic Beanstalk aims to simplify the use of cloud-based computing services for application developers. In the new service, developers will upload their application, and Elastic Beanstalk will handle capacity provisioning, load balancing, autoscaling, and application health monitoring.

Within their retail business, the company is testing Amazon Tote, a free home delivery service for customers in Seattle. The goal is to improve sales of low-priced goods such as health and beauty products, groceries, and baby care products by offering to deliver these goods to buyers without a minimum purchase requirement and free of charge.

The market is also abuzz with the news that Amazon may soon be launching their own version of Netflix by offering streaming of movies and TV shows. The service is expected to be available to Amazon Prime members and will grant them access to a library of over 5,000 titles available for streaming at no extra cost. Membership for Amazon Prime costs $79 a year; in comparison, Netflix’s streaming plan is $7.99 a month or about $96.

Amazon also has a hand in the local deals business; they recently invested $175 million in LivingSocial. LivingSocial made big news when it announced a record $13 million sale of Amazon gift cards – the promotion was selling gift cards worth $20 for $10 each. Earlier last quarter, Amazon also acquired BuyVIP, a members-only shopping site, for $96.5 million. The Madrid-based BuyVIP has over 6 million members and offers high-end goods at heavy discounts.

Amazon’s stock is trading at $172.11 with a market capitalization of $77.6 billion. It touched an all-time high of $191.60 earlier this month. From group buying to streaming video to buying clubs to cloud computing, Amazon seems to be aligned with multiple major trends and pumping on all cylinders.

The only problem I see is the profit margin, but if they can address that issue, the stock has a Google-esque trajectory ahead. Kindle sales should become more profitable as the existing approximately 10 million users start buying lots of books this year. But there is still an immense amount of infrastructure investment the company is making in cloud, streaming, and so on that will continue to limit margins for a while. This may be what will hold back the stock from taking off like a rocket.

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