Amazon unnerves investors despite soaring sales

The online retailer's revenues are up, but profits have slipped as it invests heavily in new products. Are investors right to be sceptical?

by Emma Haslett
Last Updated: 06 Nov 2012
A slight setback for Amazon's efforts to disprove the maxim ‘jack of all trades, master of none’: shares in the online retail giant slipped by nearly 2% in after-hours trading last night, after it said profits had fallen by a third in the first quarter. Admittedly that doesn't sound great. But it's not because people aren’t buying - revenues for the quarter soared by 38% to $9.86bn, up from $7.13bn in the same period last year. It's just that Amazon is choosing to invest its profits chasing future growth. The big question is whether it's spending its money in the right places...

The drop in profits wasn't exactly a surprise: Amazon had told investors to expect it (although the fall - from $299m to $201m - was slightly bigger than anticipated). And its top line is still looking extremely healthy: sales in North America jumped by 45% to $5.5bn, while it continued to perform well across Europe. The only blip came in Japan, which usually accounts for between 11-15% of its global revenue. Understandably, sales in the region weren’t as high as expected – although they still rose by nearly a third, to $4.4bn.

So why the share price drop? It’s not really about Amazon investing its profits – more about how it’s investing them. Shareholders won't bat an eyelid at the nine new distribution centres it’s planning to open this year. But they're more suspicious of its decision to plough cash into data storage centres for its new cloud computing offering, because it exposes it to competition with experts in the field like Google and Microsoft. Diversifying from books to DVDs is one thing, but providing web services for businesses requires a level of technical expertise that, at the moment, investors don't seem entirely convinced the company has.

Amazon reckons profits will drop again this year. But as long as it can continue to achieve the same level of revenue growth, say analysts, that shouldn’t be much of a problem. The challenge will come if it maintains this level of investment but revenues start falling. Although given Amazon’s history of success when it comes to dipping fingers in new pies, perhaps its shareholders shouldn't be too worried about that happening any time soon.

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