Headwinds Against Amazon May Be Rising

The e-commerce giant saw an ominous slowing of revenues

   

Amazon (NASDAQ:AMZN) CEO Jeff Bezos has often said that he’ll sacrifice short-term profits on the altar of long-term growth. Yet investors seem to have a habit of forgetting this.

This happened once again regarding the  e-commerce giant’s latest quarterly report. For the most part, investors expected a blowout Christmas. Unfortunately for Amazon, it fell well short of the lofty expectations. While revenues increased by 35% to $17.43 billion, they were off by nearly $1 billion from the consensus estimate. The company’s own guidance was for a range of $16.45 billion to $18.65 billion. The miss is particularly troubling given that Amazon continues to spend with zeal.

Oh, and the fourth-quarter profit fell by 57% to $177 million, or 38 cents per share. As should be no surprise, Amazon is spending large sums, among other things to expand its distribution footprint. Last year it built 17 massive fulfillment centers. There was also a 67% spike in headcount to 56,200.

Then there’s the Kindle Fire. For the most part, Amazon is selling the device at a loss to rapidly gain market share. The buzz is that 6 million units have shipped (Amazon hasn’t released any figures), although customer reviews have been lackluster.  In other words, might growth in Kindle purchases be lower than expected?

And is Amazon experiencing more competitive forces, such as from eBay (NASDAQ:EBAY) or the various new e-commerce sites popping up?

Despite all these things, it seems highly unlikely that Bezos will make any changes with his strategy. No doubt, the e-commerce market still represents a huge opportunity and is a big threat to traditional retailers like Best Buy (NYSE:BBY). At the same time, the industry is highly competitive. Companies like Groupon (NASDAQ:GRPN) have created new markets that Amazon needs to be a player in.

And yes, it’s absolutely critical that the Kindle Fire becomes a success. The fact is, consumers are increasingly moving over to smartphones and tablets for shopping — a category that has fierce competition from Apple (NASDAG:AAPL) and Google (NASDAQ:GOOG).

But again, it’s Amazon’s deceleration in revenue growth that should be the biggest concern for investors. After all, the stock’s high valuation — 95 times earnings — is based on expected momentum. And with the company issuing a weaker outlook for the first quarter, continued pressure on the stock is likely.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/02/headwinds-against-amazon-may-be-rising/.

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