Amazon’s Q3 call: selling more, earning less

Amazon’s Q3 call: selling more, earning less

This is the way Amazon wants it right now. Sales are up hugely, like the second year of a start-up. In this

Press Release

Amazon says net sales were up 44%: $10.88 billion in the third quarter, compared with $7.56 billion in third quarter 2010.

That’s a huge increase!

During the same, period, though,  net income decreased 73% to $63 million.

Right now, Amazon is doing what it is famous for doing…buying marketshare.

In this case, they are spending a lot of money creating marketshare. They aren’t buying it from somebody else…they are making markets. I think the Kindle Fire will create a new segment of the market…not take existing share from Apple, for example.

Naturally, a lot of antsy investors won’t get this strategy…and we’ll probably see a stock drop initially. As I look at it right now at

http://money.cnn.com/quote/quote.html?symb=AMZN

the stock went down 4.4% today. Wednesday update: it dropped another 12%.

Don’t worry about that…I could be totally wrong, of course, but I think that will bounce back quickly. What’s good for the stockholders isn’t always what’s good for us as Kindleers anyway.

There are two things that particularly stood out to me in the press release.

One was Jeff Bezos being quoted as saying that they are increasing Kindle Fire availability by millions of units. It sounds like they may not run out, as they’ve done with reflective screen Kindles. That may be because the ability to mass produce backlit devices may be easier to ramp up after all these years than reflective screens.

The other one is that they really featured Amazon Publishing in the press release. I’ve written about that quite a bit: people need to start thinking about Amazon as a major US publisher…

During the Q&A (Question & Answer) part of the conference call, which is archived at

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-irhome

they made several references to “lifetime value” of a Kindle. That’s value to them: they included content (the books and such you buy), but also things like ad revenue on the Special Offers models. As they point out, profit both from content and from advertising trail the purchase of the device. You buy the device, then you buy the content. Amazon continues to be paid by the advertisers for hypothetically years after you’ve bought your Kindle with Special Offers.

Feel free to let me know what you think…is Amazon investing too much? Will the stock recover tomorrow? Have they drilled “premium products at non-premium prices” into your head yet? ;)

Update: Interesting chart comparing Amazon’s sales to their operating income:

Business Insider

This post by Bufo Calvin originally appeared in the I Love My Kindle blog.

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8 Responses to “Amazon’s Q3 call: selling more, earning less”

  1. Sherri Says:

    Considering that the stock’s been at a P/E of 100, it’s not surprising at all that the stock price would drop when Amazon is busy investing. At that P/E, the market wants continuous spectacular growth, while Bezos, who doesn’t care that much about the market, understands that for growth, you need to spend money for infrastructure.

    Apple’s P/E is only 14, by comparison, and Google’s is 20.

    • bufocalvin Says:

      Thanks for writing, Sherri!

      Good insight! For those of you who don’t know, P/E here is Price to Earnings ratio. I’m not an expert on this, but basically, it’s how much a share of stock costs versus how much the company earns. Higher P2E means you are paying relatively more for a share…it’s not as good a value for the stockholder right now. However, it might make sense if you plan to keep it for a long time and you have a positive assessment of the company’s future.

  2. Common Sense Says:

    Investing is supposed to be for the long term, not for short gains. You invest in a company because you believe that in the long term their good/great ideas and successful management will make it a profitable company that continues to reward it’s investors.

    Amazon is that kind of company. Jeff Bezos and Amazon know what they’re doing, they’ve made smart choices all along. As one of the few companies that survived the dotcom era, I trust that they are making the right decisions by investing in the future of the company.

  3. Edward Boyhan Says:

    The scary part of the report was 4th quarter “guidance” which projects net income to be anywhere from a $200 million loss to a $250 million profit. The stock is down to around $190 from $220 in after hours trading.

    Given their upbeat comments on KF volumes and the need to increase production, this provides strong evidence to me that they are in fact selling Kfires below cost. Long term I don’t see this as a problem.

    I do see it as a problem for BN because they (as compared with Amazon) are cash poor — so I expect they are going to have difficulty matching Amazon on price with the Nook Color 2.

    In the last several quarters the stock price has always fallen in after hours trading, and then recovered in the days following. It will be interesting to see what happens this time.

    • bufocalvin Says:

      Thanks for writing, Edward!

      I agree…good comment. It’s not that complicated…let’s say Amazon is losing $10 on a Fire. In the short term, you look at that and say, “Five million units at a loss of $10 each…you are going to lose fifty million dollars! I have advise you not to do that.”

      However, on the other side, Amazon can say, “We are paying people ten dollars to make us their internet retailer…not just for digital media, which we will own, but by getting them on to Prime, physical goods, too. Five million dollars is cheap…ten dollars to buy a customer for life is the least expensive advertising campaign ever.”

      I also agree…that’s a real challenge for B&N.

  4. Roger Knights Says:

    I couldn’t get access to the conference call. There was a preliminary registration page whose entry-boxes wouldn’t accept input! (Maybe because I’m not registered as a stockholder? My system’s specs were OK when I clicked on the test box.)

    It’s a good guess that JB became severely ticked off at the agency model and the forces behind it (publishers / Apple / B&N) and that this is his response–a move to accelerate the transition to e-books (away from traditional publishers’ bread-and-butter), to Amazon’s e-book publishing subsidiaries, and to the Kindle brand of EBRs & tablets (away from the Nook & iPad). (The full-size tablet, due next year, will put more oomph behind this move, and have more of an impact on Apple.)

    Well, the agency bunch did him a favor by riling him, because I think his broad product line-up and aggressive pricing are necessary moves at this point. And they’re in-line with JB’s motto, “Get big fast.” That’s is a smart long-term strategy.

    (I think Apple made a mistake a few years back by not pricing the Mac more aggressively when Microsoft was struggling with Vista. It could have bought much market share that way, which would have paid off in profits from future business from those customers a few years down the road.)

    Amazon is scrambling to make up for lost time in the tablet market (it let Apple and B&N beat it to the punch). I warned the company (sorta) to think bigger, earlier. I.e., when the K1 came out, I posted comments on the official Kindle site to the effect that JB was wrong in restricting his vision to a single-purpose device meant for serious readers, which was his line at the time. (Unless he was cleverly trying to fake out the competition–as may have been the case.)

    I said that the Kindle wouldn’t survive unless it sold in the millions, and therefore it needed to appeal to the mass market, and therefore it needed general-purpose features that would infringe on netbook territory.

    I wish the company would screw a funnel in its ear and run a pneumatic tube across the Bay to me, so I can get its attention when I shout “Hard-a-port!” etc.

    • bufocalvin Says:

      Thanks for writing, Edward!

      Well, we’re going to disagree on this one a bit. Before the Kindle, people didn’t think Amazon could do their own hardware. That was a real gamble, and books are their gateway tech. :) It was their lowest risk. It also helped that EBRs (E-Book Readers), while around (see Sony), weren’t a mainstream product. If they had started out going head-to-head with established consumer electronic products, they could have lost…big time.They created a market (well, they made it real…a market from a molehill, so to speak).. That credibility is allowing them to launch the entertablet market, but it’s seen by many as competing with the iPad (I don’t think it really does). If that had been the perception and the Fire was the first device, I don’t think they’d be selling five million or more units this year.

      Just my thoughts on it, though…

      • Roger Knights Says:

        I’ll do the “oops” for you on the name (Roger, not Edward–that was the guy upthread).
        ———-

        “If they had started out going head-to-head with established consumer electronic products, they could have lost…big time.They created a market (well, they made it real…a market from a molehill, so to speak).. That credibility is allowing them to launch the entertablet market, …”

        Oh, sure. I had no quarrel with Amazon’s starting small with an EBR-focused gadget. I thought it was a good start. My objection was with Amazon’s plans to STAY small, as signaled by JB’s repeated statements (albeit possibly camouflage) that the Kindle was not intended to (ever) be a general-purpose device, that it was only aimed at “serious readers,” etc.

        I was talking about its next version(s). I said that it needed more mass appeal, which would require more general-purpose functionality. E.g., apps, an e-mail client, text-to-speech, — I forget what else I recommended, but that wasn’t important. What was important was the product strategy: to start thinking of the potential market as something far larger than one for serious readers only. And that if that larger market were lost, Amazon’s hold on the smaller market would be undermined and eroded.

        Amazon’s subsequent refusal to “get it” let B&N steal a march on it with the Color Nook. Those 5 million CN customers could and should have been Amazon’s if it had realized the desires of the mass market for an upgraded, general-purpose version of its type of gadget. Its blinkered vision was like the mistake Henry Ford made in refusing to make big enhancements in the features in his cars, which let GM supplant him as #1.

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