Ghost of Christmas Past Haunts Amazon

Amazon’s stock took a pummeling Wednesday after the online retailer released quarterly figures that fell short of Wall Street expectations, which had been built up in part by past years’ holiday performances.

Amazon’s net income was US$177 million, or 38 cents per share, a 57 percent percent drop from a year ago. Sales for the three months before Dec. 31 came out to $17.4 billion, lower than Wall Street expected over the traditionally busy holiday season.

The Seattle company typically does not release specific unit sales numbers for its Kindle products. Last week, though, Amazon’s website offered a teaser stating its customers were buying “well over 1 million Kindle devices per week.” In the earnings report, founder and CEO Jeff Bezos said the Kindle was “the bestselling product across both the U.S. and Europe,” and said third-party sellers saw a 65 percent unit growth over the holiday season, which accounted for 36 percent of the units sold.

The earnings fell short of most Wall Street expectations, and the market reacted strongly. Before the announcement, stock was trading around $194, but shares were down about 9 percent to $177.72 midday on Wednesday.

The report predicted anywhere from a gain of $100 million to a loss of $200 million for its next quarter outlook. The company didn’t respond to our request for comment.

Variety of Factors

Amazon was hampered by a variety of factors during the quarter that contributed to the loss. Flooding in Thailand slowed down production for many tech companies this year, affecting Amazon’s own line of products and those of companies that sell through Amazon. The company used more third-party vendors than usual, which helps margins but cuts down drastically in revenue.

“More third-party sellers were winning in this quarter than before, and that’s only about 13 percent commission for Amazon, unlike 100 percent of commission when they sell themselves,” Herman Leung, senior analyst for Susquehanna Financial Group, told the E-Commerce Times.

The world’s largest online retailer has also been using promotions such as the Amazon Prime program, where customers can pay $79 a year to receive unlimited two-day shipping. The offer draws customers to the site, but over a busy holiday season, the shipping costs hit the retailer hard.

Amazon also pointed to a lower demand than it expected for video game sales and European currency fluctuations as reasons for the loss.

Kindle Sales Now = E-Book Sales Later

Although Amazon didn’t go into exact numbers for Kindle sales, both traditional Kindle e-readers and the Kindle Fire, the tablet that went on sale in November, seem to be taking a decent portion of the e-reader and tablet markets.

“If people focus on Kindle Fire sales from a unit standpoint, they’re missing the point, because the key focus from a business model is to sell more e-books, and those carry a much higher revenue possibility,” said Leung.

Unlike the loss that Amazon probably took from its Amazon Prime customers shipping heavy loads over the holidays, e-books and other digital media don’t require shipping costs.

“A lot of people underestimate the profit of the e-book. You don’t have to pay money for delivering or printing, so you can get tremendous revenue,” said Leung.

Other analysts believe that other tablet or e-book products have a shot at taking some of the marketshare away from Amazon. Most notable among these is the iPad, which, although pricier, many customers use for multiple purposes, including as an e-reader.

“We don’t think it makes sense to buy Amazon on weakness, as it’s entering a period of secular headwinds. Digital book downloads on Apple iBook exceed those on Amazon.com for the Kindle. In addition, most of the iBooks are free,” Trip Chowdhry, senior analyst for Global Equities Research, told the E-Commerce Times.

But the Kindle and Kindle Fire users already out there are presumably poised with their hardware and ready to buy more digital media for their devices, keeping Amazon strong enough moving forward.

“Traditionally the last quarter of the year has been huge for Amazon, and that’s why the expectations were so high going in. But as we move into 2012 it looks as though some of those expectations that were near the trough of the investment cycle will still continue and investors will still put something into the company,” said Leung.