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Author: DChapin2 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 58831  
Subject: Amazon Warning Signs Date: 2/1/2012 12:45 AM
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Amazon missed on revenue. Last quarter before the Fire, they had 44% growth. This quarter w/ the Fire and many more Kindle varieties, the growth cooled to 37%. Disappointing revenue is bad for a growth stock especially when lots of growth is really expected (see 100+ PE).

Other tech companies w/ much lower PEs manage to have big revenue growth too and they don't have to goose it by selling their most popular product at negative margin.

And now 18 years after it was founded, we can look forward to a loss next quarter. The investments never seem to be enough. Will we have to wait another 18 years for the actual 10x profits expected by today's PE to actually appear?

This whole thing is dubious. Reports talk about the poor margins as a result of "investing" in the business. But do those show up in terms of Income? I thought that only appeared in depreciation. Is there that much more depreciation this year than last year?

AMZN's 8K says they spent 550M in the quarter on "fixed assets". I assume that includes things like warehouses and data centers. They only spent 1.8B for the whole *year*. That does not strike me as very much infrastructure investment. I mean Apple spent 1B on one (albeit large) data center. Or maybe warehouses and other Amazon infrastructure aren't that expensive.

No I think the results were poor because Amazon isn't selling as much as they should at an actual profit. They are hiding behind loss leading products, presumed infrastructure investments, and minimal disclosure to obfuscate their business.

I get it. They are trying to dump product on the market (books and eBooks and kindles particularly) to put others out of business so some day in the future they will be in the land of milk and honey and much higher margins.

So that's it. Their business stinks today but maybe if everyone else goes out of business they will reap the benefits. But if the growth is tailing off and that growth is predicated on selling stuff at a loss… Hmmm.

So about this business of theirs. In the xmas quarter their sales increased 30%. But those operating expenses went up 37%. Most of that was fulfillment expense, up 52%.

Their flagship product is the Kindle but they won't release Kindle sales numbers. Does a large sales number really represent a detriment to competitive advantage? If that were true, why would Amazon release any hints of big sales at all? So No, it does not or otherwise Amazon would just shut up completely. But a small number WOULD hurt them. It would reduce interest by developers in the viability of their Amazon Android store which has some pretty gnarly terms. Therefore I think we can assume that the number is not so hot. The number they DID release I think while nice sounding at first bears this out: 177% more "Kindles". That strikes me as weak. They have new touch screen eInk models they did not have last year. Their old eInk Kindle is now available for $79 which is waaay cheaper than last year's. That alone sans Fire should have been good enough to double numbers in such a nascent market. So of the "million per week" stat we got in December, I think we can see that most of that probably was NOT the Fire (even though many observers equate it with the Fire).

I also wonder how many of those were returned. I've met two people that got them for xmas. And they both returned them. I have not seen any in the wild yet. I wonder if we'll ever know?

Then I saw this in the 8K… They bought back stock in the quarter, $277 million worth. Did they do it because they think it's a great deal at a 100 PE? Or to reduce dilution? As a shareholder you didn't see much benefit from it because stock-based compensation was $159 million for the quarter ($557 million for the year).

So for every dollar of infrastructure, Amazon dilutes 30 cents. And Amazon spent more to buyback shares in the quarter than they made. That sounds like DELL in their high flying swan song years. And I thought they were explaining poor results due to "investment in the business". How do buybacks at more than 50% of your infrastructure investment help the business? I sure hope the shares they bought weren't purchased at the beginning of the quarter (or yesterday).

[dc]
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