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Cloud


Amazon Forecast Sparks Investor Concern on Big Spending

Amazon Forecast Sparks Investor Concern on Big Spending

  • Written by
  • February 2, 2017
Operating income in the first quarter will be $250 million to $900 million, which is less than a year earlier even though revenue is forecast to increase as much as 23 percent to $35.8 billion.

Amazon.com Inc. projected earnings for the current quarter that indicate stepped up spending on warehouses, movies and gadgets will continue this year at the expense of profits.

Operating income in the first quarter will be $250 million to $900 million, which is less than a year earlier even though revenue is forecast to increase as much as 23 percent to $35.8 billion.

“It means they’re going to spend a ton of money,” said Michael Pachter, an analyst at Wedbush Securities. “When you see revenue go up and earnings go down, it spooks people. It’s called negative leverage and the street hates it.”

The forecast suggests that Amazon Chief Executive Officer Jeff Bezos will continue expanding a delivery infrastructure designed to get products to customers quickly, produce more video content that encourages people to join and renew Amazon Prime memberships, build gadgets like the voice-activated Echo personal assistant and push further internationally into markets including India.

Amazon reported operating expenses rose 23 percent to $42.5 billion in the fourth quarter ended Dec. 31. The spending included $5.7 billion to store and deliver items, particularly those ordered by Prime customers who pay $99 a year for free, fast shipping. The company also announced Monday it would build a $1.49 billion air hub near Cincinnati to accommodate its growing fleet of cargo planes. The hub and planes make Amazon less reliant on United Parcel Service Inc. and FedEx Corp. and complement its network of warehouses around the country.

Holiday Sales

Sales increased 22 percent to $43.7 billion in the fourth quarter, the Seattle-based company said Thursday in a statement. Analysts estimated $44.7 billion. Foreign currency changes reduced sales growth in the period by 2 percentage points, the company said.

In Amazon Web Services, the company’s cloud-services division, revenue was $3.5 billion, up 47 percent from a year earlier. While cloud computing is Amazon’s fastest-growing and most profitable segment, that’s down from a 55 percent rise in the third quarter. Price reductions from the unit contributed to the slowdown, said Ron Josey, an analyst at JMP Securities.

“Expectations got way ahead of themselves in the fourth quarter and this is a reset,” he said.

Shares fell as much as 4.6 percent in extended trading after closing at $839.95. The stock had gained more than 10 percent over the past month in anticipation of a strong holiday period.

Prime Membership

Retail competitors, including Wal-Mart Stores Inc., are struggling to match Amazon’s quick delivery on a wide assortment of goods as shoppers shift their spending from stores to websites and smartphones. U.S. online sales in November and December totaled $91.7 billion, up 11 percent from the previous year, according to Adobe Systems Inc.

“Tens of millions” of new members joined Prime in 2016, Chief Executive Officer Jeff Bezos said in the statement. Prime had an estimated 65 million U.S. members at the end of September, according to Consumer Intelligence Research Partners in Chicago. The company doesn’t disclose the membership statistics.

Expectations for holiday revenue also were too high given the company’s dominance in e-commerce, said Vic Anthony, an analyst at Aegis Capital Corp.

“Amazon stock tends to get bid up over the euphoria of retail shifting online during the holiday shopping season, and now it’s taking a little breather,” he said.

Net income was $749 million, or $1.54 a share, from $482 million, or $1 a share, a year earlier. Analysts estimated profit of $1.36 a share.

Tags: Cloud Service Providers Digital Service Providers MSPs VARs/SIs Cloud

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