Amazon Kills the Shorts

by Tom Taulli | April 27, 2012 9:48 am

amazon box 630 300x225 Amazon Kills the Shorts[1]Ahead of Amazon‘s (NASDAQ:AMZN[2]) first-quarter report, investors were glum. Turned out there was nothing to worry about as the company handily beat the consensus on revenue and profits. In early Friday trading, the stock is up 17% to $230.

For the quarter, net income was $130 million, or 28 cents per share, on net sales of $13.18 billion. While this was down from last year’s first-quarter earnings — which came to 44 cents per share — they were much better than expected. The Street had forecast only 7 cents a share on revenue of $12.90 billion.

Amazon continued to spend aggressively to bolster growth. Costs for fulfillment were $1.3 billion in the quarter, up from $855 million in the same period a year ago. Technology and content also rose from $579 million to $945 million.

In fact, Amazon plunked down $775 million for Kiva Systems, which is a top provider of robots for distribution warehouses. It should help bring about lower costs — at least over time.

However, the company’s guidance for the second quarter looks a bit light. Revenue is expected to grow between 20% to 34%. Of course, that may be an attempt to set the bar low.

The Kindle Fire has become a big driver. According to a report from comScore, the device has seen its Google (NASDAQ:GOOG[3]) Android market share go from 29.4% in December to 54.4% in February.

The Kindle Fire is really critical. It’s a way to help blunt Apple’s (NASDAQ:AAPL[4]) tablet onslaught with its iPad. But it can also help Amazon deal with eBay (NASDAQ:EBAY[5]), which is getting lots of traction with its mobile business.

To help create even more stickiness, Amazon has also been making more of its content exclusive, with some 130,000 titles available only on its site.

No doubt, Amazon wants to remake the retail landscape. This means not only disrupting traditional retailers — like Best Buy (NYSE:BBY[6]) and Wal-Mart (NYSE:WMT[7]) — but also industries like publishing and even Web services (Amazon is one of the largest cloud providers). To pull this off, it’s willing to sacrifice operating margins, which were only 1.5% in Q1.

It’s a gutsy strategy, but it’s necessary to keep up the growth momentum. Yet investors should be cautious. The stock’s rise looks overdone and partially the result of a short squeeze. As of last month, shorts held some 2.8% of Amazon’s 450 million shares, a large chunk for a company of Amazon’s size. Still, with Amazon’s price-earnings ratio north of 180, investors who see better days coming for Jeff Bezos & Co. may want to wait before picking up shares.

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 “The Complete M&A Handbook”[8], “All About Short Selling”[9] and “All About Commodities.”[10] Follow him on Twitter at @ttaulli[11] or reach him via email[12]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/10/amazon-box-630.jpg
  2. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  3. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  4. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  5. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  6. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  7. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  8. “The Complete M&A Handbook”: http://goo.gl/aLNDk
  9. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  10. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  11. @ttaulli: https://twitter.com/ttaulli
  12. email: mailto:tom@taulli.com

Source URL: http://investorplace.com/2012/04/amazon-kills-the-shorts/
Short URL: http://invstplc.com/1fyd5YR