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Wednesday 24 September 2014

Bezos' spending spree making Amazon investors worry

Adam Satariano

Published 26/07/2014 | 02:30

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Amazon CEO Jeff Bezos
Amazon CEO Jeff Bezos

Jeff Bezos is testing the patience of investors after Amazon.com missed analysts' estimates for a second straight quarter, sending shares tumbling 11pc.

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The world's largest online retailer has reported a second-quarter loss of $126m (€94m), more than double what was predicted, even as sales climbed 23pc to $19.3bn (€14.3bn). Expenses jumped 24pc to $19.4bn (€14.4bn).

Amazon remains one of the most highly valued companies in the US, yet the business is losing some of its sheen as profits are dragged down by investments that Mr Bezos, the co-founder and chief executive, is making in cloud computing, warehouses and gadgets such as the new Fire smartphone.

While shareholders have been patient, they're increasingly seeking signs that the long-term strategy will work.

"All of us understand making investments, and then there's a point where investors don't know what the payoff is," said Michael Pachter, an analyst at Wedbush Securities, who predicted that Amazon would report a quarterly loss. "What if they get to $200bn (€149bn) in revenue and still don't have profit?"

For years, shareholders have backed Mr Bezos' view that big investments are necessary to gain share because Amazon's business opportunity is enormous and will pay off in the long run. In the process, the company has upended industries from bookstores and traditional retail outlets, to providers of web-computing software.

Investors have rewarded Amazon with the highest valuation in the Standard & Poor's 500 Index, currently trading at 569 times earnings.

After climbing 59pc in 2013, the shares have declined 10pc this year, underscoring investors' trepidation about mounting expenses.

As Bezos has funneled more money into expanding distribution, grocery delivery services and smartphones and tablets, there's little sign that sizable profits are coming and Amazon has issued a forecast for a wider loss in the third quarter.

"As long as there is money to pour into the business, they will be pouring money into the business," said Sucharita Mulpuru, an analyst at Forrester Research.

Weighing on results is a price war in the cloud-computing market, where Amazon rents data storage and computing power to other companies. Amazon, whose cloud competitors include Google and Microsoft, cut prices for its Amazon Web Services unit this year.

While Amazon doesn't disclose specific sales for web services, it's part of the "other" category under North American sales in its financial statements, where revenue in the second quarter declined by 3pc to €87m from the prior period.

"We had very substantial price reductions," chief financial officer, Tom Szkutak, said.

Amazon's lack of profits stands in stark contrast to Alibaba Group Holding Ltd, which has better margins and is planning an initial public offering soon. The Chinese web retailer disclosed in May that its profit totaled €2.08bn for the nine months to the end of December on revenue of €4,8bn. Amazon earned €204m for all of 2013 on sales of €55bn.

The loss in the latest period was the biggest since the third quarter of 2012, when Amazon posted a €204m loss.

Looking ahead, Amazon projected sales of €14.6bn to €16bn for the current quarter. Operating losses are projected to be €602m to €305m, Amazon said.

The company is in an investment cycle, which benefits customers and will eventually end, said Mr Szkutak.

"We have a tremendous amount of opportunity." While it's impacting short-term results, "we'll obviously be looking to get great returns on invested capital", he said.

Amazon doesn't disclose certain information that could shed a light on whether its investments are working. Key portions of its business are absent from its financial reports, including Kindle sales and the profit it collects from its main online store.

"You don't learn anything from Amazon because they don't answer any questions and they don't provide any metrics," Mr Pachter said.

Amazon also didn't give an update on its dispute with Hachette Book Group over digital-book sales. Both are seeking a greater share of e-book income, and Amazon blocked pre-orders for some of Hachette's books earlier this year.

Mr Bezos is spending to take Amazon further away from its roots as an online seller of books. As it makes that shift, the company is increasingly competing with large technology companies such as Apple, Google, Microsoft and Samsung.

This week Amazon is shipping its Fire smartphone. Reviewers have panned the device, citing a weak battery, lack of applications and the gimmicky nature of its 3-D display.

Strong sales or not, Jeff Bezos has proven with devices such as the Kindle Fire tablet that he'll stick with a product and continue to invest, even if early models don't prove popular.

"They keep investing in these incredibly capital-intensive businesses," Mr Mulpuru said. (Bloomberg)

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