This Key Number in Amazon Earnings May Surprise You

October 29th, 2014
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Money Morning Article of the Week

by Tara Clarke, Money Morning (Nasdaq: AMZN) reported third-quarter earnings after closing bell last Thursday.  AMZN stock ticked up throughout the day ahead of release - then plummeted more than 11% after hours.

Follow up:

Thomson Reuters analysts projected an earnings-per-share (EPS) loss of $0.74 per share and $20.84 billion in revenue. Amazon missed estimates, instead reporting an EPS loss of $0.95 a share on revenue of $20.58 billion.

In the same period a year ago, the world's largest online retailer posted an EPS loss of $0.09 per share and sales of $17.09 billion. And in its most recent quarter, AMZN reported an EPS loss of $0.27 and revenue of $19.34 billion.

It's easy to spot the trend here. EPS losses coupled with impressive sales have been the story of Amazon's business the last few years, and today's no different. In fact, the company hasn't turned a profit since 2012.

That's why AMZN stock is taking a hit today.

But EPS losses are normal for AMZN. Instead, there are two more important factors to digest in AMZN's earnings. One is product performance. The other is a number our expert stresses as the key takeaway for investors today...

AMZN Earnings: Here's What's Important

  • ROI on New Products: In 2014 alone, Amazon has come out with a dizzying array of new products and features. The company released a mobile wand for shopping with Amazon Pantry, a new, unlimited e-book subscription, and its own music streaming product. In April, it announced its Amazon Fire set-top box TV. And in July, it launched the Fire Phone. August was a particularly busy month. On Aug. 13, the company entered the mobile payment business with its Local Register device. On Aug. 18, it spent $970 million on Twitch Interactive Inc. - the world's largest gaming arena and the fourth-largest source of all U.S. web traffic. And on Aug. 20, Amazon announced a new headquarters in China to gain Asian market share.

    "These guys leave no stones unturned for the next dollar they can bring in," Money Morning Defense & Tech Specialist Michael A. Robinson said earlier this year. "Amazon is constantly upselling, cross-selling, and looking for new products, and they're great at it."

    Amazon's eye toward innovation appears to be paying off. Today the retailer said net sales are expected to be between $27.3 billion and $30.3 billion, or to grow between 7% and 18% compared with fourth quarter 2013.

    Amazon Founder and Chief Executive Officer Jeff Bezos said in a statement today:

    "As we get ready for this upcoming holiday season, we are focused on making the customer experience easier and more stress-free than ever."

    The company's next big project is to open a handful of brick-and-mortar retail shops around the country. It has confirmed locations in San Francisco, Sacramento, and Manhattan. These pop-up shops will give shoppers a chance to try out products, place web orders on, and pick up deliveries on site.

  • Operating Costs: Money Morning Defense & Tech Specialist Michael A. Robinson believes AMZN has entered a new build-out phase. He looked to operating costs, and that's the most important takeaway for investors today.Here's why...The company reported an operating loss of $544 million, compared with operating loss of $25 million in third quarter 2013. It said it expects operating losses in Q4 will come in between $430 million and $570 million.

    Because of the amount of cash it pumps into expansion, Robinson views AMZN as a growth stock - more like a biotech company than a typical retailer. And that means investors have to be patient.

    Robinson said in late July:

    "This is the kind of thing growth investors have to deal with on a regular basis. The next leg up for a company means at least a few quarters of losses on a per share basis because it's expensive to ramp up. I don't think they know how long their build out is going to take, and so they intentionally leave earnings reports and calls vague to give some wiggle room."

    Of course, investors hate uncertainty. That's why AMZN stock has fallen more than 20% this year, and was down more than 11% after hours today.

    Robinson said:
    "You have no sense of when this fabulous growth in sales is going to come together. But Amazon's probably the best e-commerce platform on earth, and when it does come together, it'll create EPS that we can count on for a long time."

Here at Money Morning, we believe tech investments are an essential step in wealth building. The sector creates some of the richest investors - and continues to get more lucrative. It's no surprise that companies working on Ebola treatments are the hot topic in tech right now. A number of companies are racing to find a treatment, and investors are piling in. But here's what you need to know about these "Ebola stocks"...


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