As one of the survivors of the dot-com era, Amazon.com, Inc. (NASDAQ:AMZN) has been living proof that investors will put up with losses almost indefinitely as long they believe in the company’s long-term narrative, but the bulls were shaken by second quarter earnings when 23% earnings growth was overshadowed by 24% higher earnings, resulting $126 million in losses, nearly double what the market was expecting. Then when Amazon issued guidance that the company would lose between $410 million and $810 million this quarter, it pushed share prices even lower, leaving them at a 10% loss from yesterday’s close.
“All of us understand making investments, and then there’s a point where investors don’t know what the payoff is,” said Webush Securities analyst Michael Pachter, reports Adam Satariano for Bloomberg. “What if they get to $200 billion in revenue and still don’t have profit?”
Bezos has never much cared about profitability
While the size of Amazon.com, Inc.’s (NASDAQ:AMZN) losses caught people by surprise, the attitude really shouldn’t. Amazon CEO Jeff Bezos has never been concerned that concerned with turning a profit and has taken money from the online retail side of the business into other capital intensive businesses. Amazon Web Services has become a player in the cloud industry, but it is facing margin pressure as competition increases, while the Fire Tablet was a dud and the new smartphone (designed with the belief that people want to jerk their head around instead of touch a screen) doesn’t look promising either.
And for most of its history, the market has had his back. Trust that growing revenue would someday turn into big profits have taken Amazon.com, Inc. (NASDAQ:AMZN) stocks from less than $50 in 2008 to nearly $400 at the end of last year. The market has never pushed Bezos to emphasize profits, and it’s obviously not his first impulse.
If Amazon’s stock price bounces back, Bezos won’t have an incentive to focus on profits
The big question is what happens next. If Bezos decides that it’s important for Amazon.com, Inc. (NASDAQ:AMZN) to become significantly profitable, he could probably trim the fat and start showing a profit in the next couple of quarters. Maybe today’s market drop will convince him that’s the right course of action. But if bulls see this as a buying opportunity and the stock price bounces back, wait for the cycle to repeat.