Amazon (AMZN) Misses Earnings Due to Contracting Margins and Rising Costs

Last week, online retail giant Amazon (AMZN: Charts, News) posted disappointing third quarter earnings that came in below analyst estimates. Seattle, Washington-based Amazon posted a loss of 60 cents per share, or $274 million, down from a profit of 14 cents per share, or $63 million, a year earlier.

Analysts had expected a loss of 8 cents per share. Amazon hadn't posted a loss since the second quarter of 2003, when the stock was trading at less than $40 per share. Stock Analysis Revenue rose 27% to $13.8 billion from year earlier, a slight slowdown from the 29% growth it posted in the prior year quarter, which still topped the average analyst estimate of $13.6 billion. Amazon attributed its weak third quarter earnings to heavy investments in expanding its business into new markets. The largest of these investments, in daily deals service Living Social, contributed to a loss of 37 cents per share, or $169 million. Looking ahead to the fourth quarter, Amazon expects to earn a profit between $310 million to $490 million, on revenue between $20.25 billion and $22.75 billion. Analysts had expected Amazon to generate $22.79 billion in revenue. Amazonâ s operating margin as a percentage of worldwide sales also slid into negative territory from 0.8% in the prior year quarter. Its margins notably contracted as a result of producing its popular Kindle e-readers and tablets - which are sold at a loss to generate more sales through the sales of its books, media and software applications. Kindle related expenses, which including licensing costs of media streamed through its Amazon Prime service, rose to $1.2 billion, up from $769 million a year earlier. Operating expenses surged 28%, outpacing revenue growth. Meanwhile, the company increased the size of its workforce by 59% from a year earlier, ending the quarter with 81,400 employees. Amazon has been attempting to cut shipping times to customers by adding fulfillment centers across the country. Amazon opened 19 new fulfillment centers during the year, on top of the 69 centers it opened in fiscal 2011. Many of these centers were opened in order to cut deals with state governments for lower tax rates in exchange for providing permanent and temporary jobs. Earlier this year, several states decided to charge sales tax on online purchases made from Amazonâ s website. Amazon plans to bring in at least 50,000 temporary workers at its fulfillment centers during the busy holiday shopping season. Amazonâ s earnings miss came at the end of a rough week for tech investors. A week earlier, Google (GOOG: Charts, News) missed earnings by a wide margin, while Apple (AAPL: Charts, News) missed analyst forecasts on the same day as Amazon. Some analysts remain skeptical that Amazon can continue trading at over 100 times trailing earnings. BGC Partners analyst Colin Gillis summarized Amazon's earnings with a few words: â

Published on Oct 29, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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