Amazon Slumps as Increased Spending Limits Profit Growth

Amazon.com Inc. (AMZN) plunged almost 10 percent after Chief Executive Officer Jeff Bezos told investors that his spending binge isn’t slowing.

Bezos is pouring cash into warehouses for faster shipments, a grocery delivery service and a TV set-top box to compete with Netflix Inc. and Apple Inc. in video streaming. Expenses rose 23 percent during the quarter, limiting profit to $108 million. With investments expected to continue for the foreseeable future, the company forecast an operating loss for the current quarter of $55 million to $455 million.

“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 the close in New York, the lowest in six months. Amazon has lost almost a quarter of its value this year.

That weakness had a spillover effect on other technology stocks today, with shares of Facebook Inc. (FB), Twitter Inc. and LinkedIn Corp. all dropping more than 5 percent.

Amazon’s results spooked investors who have been waiting for the heavy spending to translate into profit. Bezos is pushing the Seattle-based company far beyond its roots as an online seller of everything from books to children’s toys.

Photographer: David Paul Morris/Bloomberg

An employee stows items at the Amazon.com Inc. fulfillment center in Phoenix, Arizona. Close

An employee stows items at the Amazon.com Inc. fulfillment center in Phoenix, Arizona.

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Photographer: David Paul Morris/Bloomberg

An employee stows items at the Amazon.com Inc. fulfillment center in Phoenix, Arizona.

Fulfillment Centers

In the first quarter, net income rose to $108 million, or 23 cents a share, from $82 million, or 18 cents a year ago. Profit matched analysts’ estimates.

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.

Still, Amazon has long justified heavy spending to enter new markets that will eventually generate returns. Investors have backed the strategy, pricing its stock at almost 500 times earnings, compared to the average price-to-earnings ratio of 34.5 for companies in the Nasdaq Composite Index. (CCMP)

Backing Growth

To supporters, Amazon’s growth potential is huge. While it dominates Internet retailing, the company is still small in comparison to Wal-Mart Stores Inc., and it also has big opportunities with media and cloud computing, said Colin Sebastian, an analyst at Robert W. Baird & Co., who has the equivalent of a buy rating on the stock.

“They are barely scratching the surface,” he said.

Looking ahead, Amazon projected sales of $18.1 billion to $19.8 billion for the current quarter.

The revenue is being reinvested in areas like food delivery. The company 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 can be shipped for a flat $5.99 fee.

Amazon also has been increasing investment in China, with fulfillment centers and product supplies 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.

More Gadgets

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

Its cloud-computing business, Amazon Web Services, is used by companies including Comcast Corp. (CMCSA), Pfizer Inc. and many Silicon Valley startups.

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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