Amazon.com, Inc. (NASDAQ:AMZN) investors are looking cautious on the increased spending by the company. Investors have been bearing the spending expecting the revenue growth would ultimately transform into healthy profits and profit margins. However, a report from McAdams Wright Ragen dated July 25, 2014 by analyst Dan Geiman says the stock may under perform if investors are not in the mood of giving the benefit of the doubt and expect to “see signs of stabilization in margins and investment” at the earliest.
Weak profits, strong revenues
Amazon posted its second-quarter 2014 earnings, which were mixed. The company posted a loss of ($0.27) per share compared to the analyst estimate of ($0.20) per share and the Street View of ($0.15) per share. Operating loss of the company came in at $15 million, which was above the analyst estimate of $114 million; even though most of the loss occurred due to lower than expected stock-based comp expenses.
The revenue performance in the second-quarter was very strong, increasing 23% year over year or 22% to $19.34 billion, which is above the analyst estimate of $19.0 billion, and also in-line with the Street estimates of $19.34 billion. Amazon web service sales were weak as sales increased 38% year over year, below recent growth rates.
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For the third-quarter 2014, management has guided an operating loss of $410–$810 million, “an eye opener that suggests that the ongoing investment cycle will accelerate and continue for some time,” believe analysts.
Same strategy not working for Amazon
Amazon shares dropped more than 10% after the result was announced. In the recent quarter, the company invested in the new ventures, launched the Fire smartphone and introduced a new unlimited e-book rental service.
The shares of the company overpowered the broad market in the past, when the top-line executive assured the investors not to take note of the short-term losses, instead go for the long-term potential of this company to dominate in the retail and consumer electronics.
This time, also, the management reiterated the same strategy noting Amazon’s entry into the smartphone market. CEO Jeff Bezos, also, said that customers in the United States will start receiving the new Fire phones including Firefly, Dynamic Perspective, and one full year of Prime. Bezos said that company is more than eager to see the phones in the customers hands.
But, it looks like investors have had enough, as year to date Amazon has lost nearly a fifth of its value.