Amazon.com Drops as Forecast Falls Short of Estimates

Amazon.com Inc., the largest online retailer, fell 7.2 percent in New York trading after forecasting first-quarter profit that may be lower than analysts predict as it steps up spending on warehouses and data centers.

Operating profit will be $260 million to $385 million this quarter, Seattle-based Amazon said yesterday in a statement. Sales will be as low as $9.1 billion. That compares with operating profit of $474 million and revenue of $9.36 billion, the averages in a Bloomberg survey of analysts.

Chief Executive Officer Jeff Bezos is using part of the company’s growing cash hoard to build at least seven new fulfillment centers this year to handle a growing range of products sold over the Web. Amazon, whose shares have almost quadrupled in two years, also is expanding a business that delivers computing tasks over the Internet.

“Is this going to be a low-margin business?” said Colin Gillis, an analyst at BGC Partners in New York, who has a “sell” rating on the stock. “Amazon has hit a level of maturity. So the question is, how long do investors have to wait?”

Amazon slid $13.31 to $171.14 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has gained 36 percent in the past year.

This year Amazon will more than double capital expenditures to $851 million, analysts at Goldman Sachs Group Inc. estimate, as it constructs more warehouses and data centers.

Fourth-Quarter Sales

“We’ve shown over our history that we’re able to get great returns on the assets we invest in,” Chief Financial Officer Tom Szkutak said on a conference call with reporters.

Sales in the final three months of 2010 rose 36 percent to $12.9 billion, shy of the $13 billion average prediction in a Bloomberg survey.

“It’s the first time in many quarters we have seen some noise with the top line,” said Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco. “Being a growth stock, it does not do well with any surprise to the top line.”

Profit rose 8 percent to $416 million, or 91 cents a share. Analysts surveyed by Bloomberg had anticipated, on average, profit of 88 cents. Amazon doesn’t forecast net income. Operating income typically refers to earnings before deductions for taxes and interest payments.

Trading ‘Sideways’

The shares are highly valued and may not immediately resume their climb, said Mayuresh Masurekar, an analyst at Kaufman Bros. in New York.

“While Amazon has excellent long-term growth prospects, the stock should trade sideways near term, due to margin pressure and fully priced valuation,” said Masurekar, who has a “hold” rating on the shares.

Amazon is turning to new businesses for growth. The Kindle accounted for 5 percent of total revenue in 2010, said Aaron Kessler, an analyst at ThinkEquity LLC. He estimates that Amazon sold 5.1 million Kindles last year, though he says that may be “conservative.” The company may have sold more than 8 million of the devices in 2010, two people familiar with the matter said in December. Amazon doesn’t disclose Kindle sales.

The Kindle business, including sales of the e-reader device and digital books, is becoming a “meaningful contributor,” Kessler said.

Amazon is also aiming to boost growth through acquisitions. It announced plans to buy Diapers.com parent Quidsi Inc. in November. It also led a $183 million investment round last month in LivingSocial, the No. 2 daily deal site behind Groupon Inc.

DVDs, Baby Clothes

Amazon got its start in 1995 as an online bookseller. It has since expanded into dozens of products, from DVDs to baby clothes. Amazon Web Services, which lets customers rent computer capacity to house data and run computer applications, may one day be as big as the retail business, the company has said.

The quarterly results follow a record holiday for online retailers. Online sales rose 12 percent to $32.6 billion, reaching a high for the two-month holiday shopping season, according to Reston, Virginia-based researcher ComScore Inc.

Forrester Research Inc. raised its forecast for e-commerce spending, saying the market will grow 12 percent to $197.3 billion in 2011. It had previously predicted 11 percent growth.

EBay Inc. reported profit and sales forecasts last week that may exceed analysts’ projections, helped by the growth of its PayPal payment processing unit and improvements to its main site.

To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.

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