Quick Thoughts: Amazon Doesn’t Care About Your Precious Quarterly Results


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In a sea of short-term thinking, Jeff Bezos thinks long.  Once again, Amazon has taken a bullet in the service of its long term manifest destiny, a wound that its investors should be conditioned to receive periodically as the company continually invests to strengthen its strategic hand.  3Q11 sales were up 44% YoY, with furious pre-ordering for its recently announced line of Kindle updates indicative of further top-line excellence in 4Q.  BUT – 3Q11 earnings of $0.14 missed consensus by more than 40% and 4Q guidance raised the possibility of a quarterly loss.  The culprit was yet another step function jump in operating costs, leading analysts to muse over whether or not the company will ever ease off of the accelerator long enough to reap what it has sown.

I applaud Bezos for understanding the stakes of the game he is playing.  Amazon has the potential to challenge Apple, Google, Facebook, and Microsoft for the hearts and minds of Internet consumers.   In a previous blog post, I made the point that these companies are crafting their own curated Internet services to be tightly integrated into a comprehensive experience across devices.  The spoils of potential victory are mouthwatering – $8T in global non-food retailing, $1.5T in global advertising revenues, $400B in global media broadcasting, $150B in global retail payments, etc. – and the competition is serious.  Google investors have their own frustrations over its ongoing investments, while Facebook’s non-public status shields what is undoubtedly furious spending of its own.

Amazon’s status as the king of e-tailers is a powerful funding engine in pursuing these loftier aims.  Now, Bezos is building infrastructure (both for physical distribution and data center capacity), securing digital content, and seeding the market with millions of Kindles selling below cost.  This spending is on purpose – not an exogenous shock or a lack of control.  Amazon needs to sustain its leadership in web commerce.  It needs to sustain scale advantage in web hosting and its leading edge skill set as well.  It needs to establish its bone fides as a gateway for streaming media content to be ready to challenge cable.  It needs to extend its influence to the device level to cement its customer relationships, combat Apple and Google, and extend into new revenue streams – local ads, mobile payments, etc..  All of this should pay off handsomely in the future, but it all costs money now.

As such, investment in Amazon, Google, and perhaps in the future, Apple and Facebook, will come with quarter to quarter risk on margins and earnings.  In return, each of these companies is capable of delivering extraordinary sustained top line growth, sufficient to absorb occasional earnings disappointments and multiple contraction.

Meanwhile, in other news, Nokia finally announced its Microsoft powered smartphones for 4Q.  The specs for the devices have already been well hashed over in the industry rumor mill, but the actual products have the look of a good start.  A healthy Nokia could be a powerful weapon in driving Windows Phone to relevance, so sales of these devices will have strong resonance in Redmond Washington as well as Espoo Finland.  Given valuations for both companies, the market seems to have pre-ordained failure, but I am not nearly so pessimistic.  The strength of the Nokia brand in Europe and emerging markets, Microsoft’s enterprise position, the rooting interest of carriers, developers and OEMs, and the general excellence of the Windows Phone platform itself constitute a better hand than is credited by the market.




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