October 21, 2010 / 8:35 PM / in 9 years

Instant View: Amazon beats Street but margins compress

LOS ANGELES (Reuters) - Amazon.com Inc (AMZN.O) beat quarterly earnings expectations but the world’s largest online retailer saw costs rise, and its shares fell nearly 5 percent.

Commentary:

SCOTT TILGHMAN, ANALYST, HUDSON SQUARE RESEARCH

“It looks like fulfillment expense was the single biggest driver for operating income being a bit light... Otherwise, a very solid quarter, good growth both in North America and international.

“It looks like fulfillment expenses are running much higher than any of us anticipated... The holidays are a time when you can earn customers, and what we suspect is Amazon has some promotional plans in place to attempt to acquire new customers through either pricing or shipping specials or some combination of the two more so than they have been doing to give them another leg of growth.

“What they might be doing is trading a little of margin for longer-term growth opportunity. Trade the margin in the fourth quarter, your highest traffic quarter, in exchange for driving that traffic over the next few years.”

STEPHEN JU, ANALYST, RBC CAPITAL MARKETS

“It’s probably the operating-profit dollar guidance for the fourth quarter more than anything else.

“We’ll have to see what’s affecting that on the conference call. My guess is that they continue to spend on fulfillment facilities expansion.”

FRED MORAN, ANALYST, BENCHMARK COMPANY

“Amazon once again shows that it has tremendous top line growth with a 39 percent revenue improvement, even though comparisons have started to get tougher and guidance for as much as a 40 percent revenue increase in the fourth quarter.

“It is still dominating in e-commerce and gaining share across the global retail sector. But the margins seemed weaker than expected both in the third quarter and in the guidance for the fourth quarter, and therefore on a bottom line basis it was certainly not better than expectations and may be a bit of concern for investors.

“It’s possible that, because it’s understood that Amazon is in a reinvestment cycle, that they will be given a pass on this temporary earnings impairment in the hope that margins will be restored next year.

“With Amazon trading at the higher end of its historical valuation..., the margin impairment, even if it’s temporary, may overhang the shares. Long-term investors can be comfortable with this stock, we just think it’s fully valued for the balance of this year.

“Their guidance shows that the U.S. consumer is cautiously coming back and that the holiday season should be slightly better than last year. Channel checks show that it will in no way be a blowout holiday quarter. But even in that kind of environment, overall e-commerce can grow 9 or 10 percent year over year and Amazon can grown 30 or 40 percent year over year just because they continue to take share on a global basis.

“We have a “hold” rating and $165 price target on Amazon. We think the stock is maintaining a high valuation because of its significant top line growth, but may have trouble pushing higher while these margins remain impaired.”

COLIN GILLIS, ANALYST, BGC PARTNERS IN NEW YORK

“Revenue increased 39 percent but operating income only grew 7 percent. It’s the opposite of what people want to see. People want to see more leverage coming out of the company.

“In terms of holiday, the guidance for Q4 is fine on the top line. This is not a revenue issue right now. This is a possibility issue with Amazon. A leverage, margin issue. On the last call, they talked about how the company needs to be investing to prepare for future growth.

“But it’s also important to realize that this is an expensive stock, the most expensive stock in our technology universe. It’s priced at perfection.”

MANAGEMENT IN NEW YORK:

“It looks to be a very solid report. It remains to be seen where the stock is going to end up. It has run up significantly since the last time they reported so a little selloff shouldn’t be entirely unexpected. The story remains quite strong. It’s also putting up very significant top- and bottom-line numbers, among the best in the industry, which we expect will continue.

“I do believe the holiday is going to be really quite strong for Amazon. Kindles are going to sell exceptionally well. The distribution points into Target and Best Buy are certainly a plus. It’s going to be a great gift. $139 is quite a good price point and ultimately that will translate to higher margin sales of books into 2011.

“I do think that general merchandise will pick up as well in the fourth quarter. Guidance seems to be in line with expectations for the fourth quarter at least for the top line.

“It’s very typical for the company to provide very wide guidance and obviously hopefully they will hit the upper end of it, if not beat it. They don’t want to go out on a limb given the economic backdrop which we have right now.”

Reporting by Nichola Groom in Los Angeles and Phil Wahba in New York

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