Amazon has a pretty stable pattern when it comes to reporting earnings. It delivers big growth in revenue, and little-to-no profits. For the last couple years that has kept the company's share price on a steady upward climb. But it may be approaching unsustainable levels.
Today Amazon announced its second quarter earnings, and losses were nearly twice what analysts had predicted, leading to a more than 5 percent drop in its share price during after-hours trading. More importantly, Amazon predicted that its losses for next quarter would be between $410 and $810 million, or more than 16 times the amount it lost during the third quarter of last year.
Losses will widen dramatically
Analysts say the widening red ink isn't hard to explain."It costs a lot to launch a smartphone," says Michael Pachter of Wedbush. "It isn’t anything more sinister than that, although it’s possible that they are going to spend a lot more on content and offer a more comprehensive entertainment offering [of] books, movies, games, music, and television."
As it has explained with both the Kindle and the Fire TV, Amazon's strategy is to sell hardware at cost in order to bring people into its shopping ecosystem. "We have a philosophy that we try to price our devices as close to break-even as we possibly can," Kindle VP Dave Limp told The Verge back in April. "If they put it in a drawer, we’ve not benefited at all." Once the consumer has a Fire TV in their living room, he says, "somebody might buy à la carte content, movies, TV shows. Somebody might sign up for Prime ... we want to be really aligned with the customer so that we only make money when they use our products, not when they buy them."
"We try to price our devices as close to break-even as we possibly can."
Citigroup downgraded Amazon's stock yesterday based on the price cuts it instituted on its Amazon Web Services division. Up until now Bezos has been able to sell investors on his mantra of long-term thinking that invests heavily in new areas at the expense of profits. It's too soon to make a call, but the market may not give him the benefit of the doubt much longer.