Amazon margins raise concern
LOS ANGELES (Reuters) - Amazon.com Inc reported on Tuesday a drop in profit margins from the previous quarter, unpleasantly surprising investors betting on continued improvement at the world's largest Web retailer, and its shares fell 9 percent.
Third-quarter results topped Wall Street average targets, and the company forecast fourth-quarter revenue ahead of many analysts' views, but that was not enough to satisfy investors who have pushed the shares up to a valuation far beyond peers.
"The stock is down because there was some speculation that Amazon would blow the quarter away and it came in 1 cent above consensus. It certainly took a little bit of the sizzle out," said Robert Toomey, an analyst with E.K. Riley Advisors.
Amazon shares dropped to $91.49 after a frenzy of trading before the bell pushed them up more than 10 percent to $100.82 on Nasdaq -- its first close above the $100 mark since 2000.
"It is still trading at twice Google's multiple on 2008 estimates," said Global Crown Capital analyst Martin Pyykkonen, referring to the after-hours share price.
"That's priced to perfection and you're not getting perfection here," he added, pointing to a decline in operating profit margin to 3.8 percent of global sales from 4.0 percent in the previous quarter.
Despite recent bullish sentiment, some on Wall Street had warned that recent gains in Amazon's operating profit margin were not sustainable, and that more periods of investment spending, which tend to depress margins, were inevitable.
Amazon, after delighting investors with impressive results in the first two quarters, said third-quarter net income more than quadrupled to $80 million, or 19 cents per share, from $19 million, or 5 cents per share, a year earlier.
Revenue, boosted by the latest Harry Potter book and double-digit growth both at home and abroad, rose 41 percent to $3.26 billion. Excluding "Harry Potter and the Deathly Hallows," sales rose 35 percent, Chief Financial Officer Tom Szkutak said.
The results beat average Wall Street estimates of 18 cents per share in profit on $3.13 billion in revenue, according to Reuters Estimates.
The popular Harry Potter book, which was heavily discounted, had a negative effect on gross margins in the quarter, which fell to 23.4 percent of worldwide sales from 23.8 percent a year ago and 24.3 percent in the prior quarter.
Operating income rose to $123 million from $40 million, above Amazon's own forecast for $75 million to $110 million.
For the fourth quarter, Seattle-based Amazon said it expects net sales of $5.1 billion to $5.45 billion, with operating income of $221 million to $291 million.
Analysts, on average, have been expecting fourth-quarter net sales of $5.14 billion, according to Reuters Estimates.
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