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Amazon Slumps as Increased Spending Limits Profit Growth

By Adam Satariano and Sarah Frier
April 26, 2014 12:01 AM EDT 50 Comments
Jeff Bezos, chief executive officer of Amazon.com Inc., is pouring cash into warehouses, a grocery delivery service and a TV set-top box, and the company said it expects an operating loss this
quarter of $55 million to $455 million.
Photographer: Patrick Fallon/Bloomberg
Jeff Bezos, chief executive officer of Amazon.com Inc., is pouring cash into warehouses, a grocery delivery service and a TV set-top box, and the company said it expects an operating loss this quarter of $55 million to $455 million.

Amazon.com Inc. (AMZN)’s Jeff Bezos scared off investors across the technology landscape after announcing intentions to continue his spending spree.

Amazon shares fell almost 10 percent yesterday, leading an industrywide plunge that pushed Facebook Inc. (FB), Twitter Inc., Netflix Inc. and LinkedIn Corp. each down more than 5 percent. They all gained at least 59 percent in 2013, double the increase in the Standard & Poor’s 500 Index.

“You’ve seen a prick in the bubble of some of these tech stocks,” said Pat Becker Jr., a fund manager at Becker Capital Management in Portland, Oregon, which oversees $3.1 billion. “It’s been a momentum driven market in some names and that momentum has ceased.”

Bezos, Amazon’s chief executive officer, is pouring cash into warehouses, a grocery delivery service and a TV set-top box, and the company said it expects an operating loss this quarter of $55 million to $455 million. Facebook struck a similar chord earlier in the week, saying that spending will increase for the rest of this year on projects like the photo-sharing application Instagram and video advertising.

Those comments didn’t sit well with profit-hungry investors. The Nasdaq Composite Index (CCMP) fell 1.8 percent yesterday, with four-fifths of its members declining. The index is down 6.5 percent since its high for the year in early March.

Amazon’s expenses rose 23 percent during the quarter. Net income rose to $108 million, or 23 cents a share, from $82 million, or 18 cents a year ago, matching analysts’ estimates.

Don’t Wait

“People who are hoping for the profit kick are going to have to wait a long time,” said Kerry Rice, an analyst at Needham & Co. in San Francisco who rates the stock a hold.

The shares fell 9.9 percent to $303.83 at yesterday’s close in New York, the lowest in six months. Amazon has lost almost a quarter of its value this year.

Bezos is pushing Amazon far beyond its roots as an online seller of everything from books to children’s toys. Its cloud-computing business, Amazon Web Services, is used by companies including Comcast Corp. (CMCSA), Pfizer Inc. and scores of Silicon Valley startups.

Total operating expenses increased to $19.6 billion from $15.9 billion a year ago. In particular, fulfillment expenses climbed 29 percent to $2.3 billion while technology and content costs jumped 44 percent to $2 billion. The spending crimped the company’s narrow operating margin to 0.7 percent, down from 1.1 percent a year earlier.

The company has taken steps to defray some costs. It increased the price of its fast-shipping membership program, called Prime, by 25 percent. Customers now pay $99 a year, up from $79 previously.

China Investing

Amazon has boosted investment in China, with fulfillment centers and retail to make sure the company has items in stock for customers, Chief Financial Officer Tom Szkutak said on a conference call. The company has also started ramping up spending in Italy and Spain, he said.

Looking ahead, Amazon projected sales of $18.1 billion to $19.8 billion for the current quarter. Analysts were on average estimating $19 billion, according to data compiled by Bloomberg.

The company also unveiled a new grocery service for its Prime members called Prime Pantry, which lets people buy goods in bulk to pack into a box that holds as much as 45 pounds and that can be shipped for a flat $5.99 fee.

Amazon is releasing more hardware gadgets and has been developing a smartphone to vie with Apple Inc.’s iPhone and devices that run Google Inc. (GOOG)’s Android operating system, people with knowledge of the matter have said.

More Movies

In addition, Bezos is making Amazon a force in the media industry. The company this week announced a partnership so Prime subscribers can stream older HBO shows, including “The Sopranos” and “The Wire,” through Amazon’s Instant Video service. That followed Amazon’s introduction of the Fire TV set-top box for watching Internet-delivered programs and movies.

The efforts have Amazon competing more directly with Apple, Netflix and Google, which also are also vying for a piece of people’s home-entertainment dollars.

“Amazon keeps spending like drunken sailors,” said Gene Munster, an analyst with Piper Jaffray Cos. (PJC), who has the equivalent of a buy rating on the stock.

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Sarah Frier in San Francisco at sfrier1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Ari Levy

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