Quick Thoughts: AMZN 2Q14 – Jeff Bezos REALLY Doesn’t Care about You


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–          AMZN delivered its 4th quarterly loss in two years, well below both guidance and consensus, driven by massive investment in new content, devices, and services, and promised bigger losses next Q.

–          Sales were characteristically strong, up 23% YoY, but opex was up even more at 24%. As usual, management is offering no specific detail on the drivers of either sales or expenses.

–          AMZN is launching a smartphone, a set top box, streaming music, and an e-book subscription service. It is rolling out same day and grocery delivery. It is expanding AWS and int’l operations.

–          AMZN has a big lead in pursuing massive market opportunities. These huge investments will likely prove worthy with time, but Bezos may need to let up to avoid further bleeding in future quarters.

Amazon is a maddening company. It has the inside track on an e-commerce opportunity that addresses tens of TRILLIONS of dollars in global retail and wholesale sales. Against that opportunity, it is building an enormous moat of scale economies and logistic capabilities that may be impossible for future would-be rivals to counter. It is also furiously building scale to sustain its first move advantage in commercial cloud data center hosting, a business that itself targets TRILLIONS of dollars in enterprise IT spending. It is playing a high stakes competitive game and it is winning. So much for the good news.

At the same time, Amazon and its founder and CEO Jeff Bezos is also setting a standard for investor antipathy. For the past 8 quarters, Amazon has averaged more than 22% YoY growth while it has delivered losses half of the time. It’s not that Amazon’s core business is unprofitable – it has enviable gross margins for a retail operation and we calculate that the intrinsic operating margins are likely a robust 8-9%. Rather, it’s that Amazon plows every spare dime of profits back into growing the business. Over the past 6 months, Amazon has announced its own smartphone platform, the Fire Phone, with its own ecosystem of apps and content, including a spanking new streaming music service and a revamped app store. It has introduced its own alternative TV set-top box, the Fire TV, and bulked up its streaming video service, linked at no extra charge to its popular Prime membership program, with expensive new original content and exclusive library programming. It just announced a monthly subscription service for e-books that will build loyalty and generate meaningful revenues, once the launch costs are amortized. It has been embroiled in an expensive negotiating battle with publisher Hachette that has kept more than 20% of popular book titles off of its virtual shelves – Amazon’s aggressive stance will likely pay off long term, but meanwhile ….

In its core business, Amazon is bringing same-day delivery to many new markets, necessitating investment in new fulfillment centers ever closer to its end users and in establishing reliable delivery partners as well. In some of these markets, it is introducing grocery delivery, putting even greater execution pressure on its logistics infrastructure by adding perishable items requiring end to end refrigeration. Amazon is also entering entirely new geographies, always requiring investment in additional infrastructure. It also has engaged in a massive price war in its AWS cloud hosting operation, driving massive demand for computing and storage resources. Behind the scenes, it is also developing and testing rugged unmanned delivery drones to hasten future deliveries, amongst other undisclosed and likely futuristic R&D projects.

All of this is REALLY, REALLY expensive, and it plays through both CAPEX and operating expenses. This is the basic reason that Amazon keeps missing quarters and investors have been very patient, keeping the company’s market cap to a robust 2x trailing sales despite the vexing lack of profits. This time, investors may have had enough. Amazon had guided to a loss in 2Q14, and investors had taken their lumps for it at the time. The actual 2Q14 losses were triple what investors had been promised and the guidance for 3Q14 suggested that they might triple once again. In after hours, Amazon shares were beaten down by more than 10% in a collective fit of investor frustration.

CEO Jeff Bezos doesn’t seem to care about any of this as he pursues the manifest destiny of global e-tail and cloud hosting domination. In an industry marked by distain for shareholders and fanatical secrecy, his company sets the standard. Still, an angry investor base and a plummeting share price would severely cut back his strategic degrees of freedom by threatening employee morale and retention and by casting doubt with the company’s strategic partners. Soon, if not now, Amazon will have to begin to show the market that is, indeed, able to generate real profits from its operations and, perhaps, give its investors more than a narrow glimpse into the inner workings of its business.

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