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Amazon Loss Widens as Bezos Pours Money Into New Services

July 25 (Bloomberg) -- Julian Emanuel, U.S. equity and derivatives strategist at UBS, examines how long investors will stand by as tech companies spend more to build out new services. He speaks on “Bloomberg Surveillance.”

Amazon.com Inc. (AMZN) fell more than 11 percent after posting its widest loss since 2012, as its cloud-computing business showed signs of cooling and investments in new distribution warehouses and gadgets hold back profitability.

The world’s largest online retailer had a second-quarter loss of $126 million, wider than analysts’ $66.7 million average estimate and a $7 million loss a year earlier. Sales climbed 23 percent to $19.3 billion, while operating expenses increased 24 percent to $19.4 billion, Amazon said in a statement today.

Chief Executive Officer Jeff Bezos’s strategy since Amazon’s inception has been to invest heavily to expand and earn customer loyalty. While the approach has disrupted industries from bookstores and electronics outlets to providers of Web-computing software, it’s been expensive. Amazon began posting quarterly losses in 2012 after being consistently profitable for almost a decade.

“As long as there is money to pour into the business, they will be pouring money into the business,” said Sucharita Mulpuru, an analyst at Forrester Research in Cambridge, Massachusetts. “If you can spend down all your profit and nobody is going to penalize you for it, why show a profit?”

Photographer: Chris Ratcliffe/Bloomberg

An Amazon.com Inc. pickup and collect locker in Newbury, U.K., on July 23, 2014. Close

An Amazon.com Inc. pickup and collect locker in Newbury, U.K., on July 23, 2014.

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Photographer: Chris Ratcliffe/Bloomberg

An Amazon.com Inc. pickup and collect locker in Newbury, U.K., on July 23, 2014.

The stock fell as much as 11.5 percent in extended trading. The stock rose less than 1 percent to $358.61 at the close in New York, leaving it down 10 percent this year.

Weighing on results is a price war in the cloud-computing market, where Amazon rents data storage and computing power to other companies. Amazon, whose cloud competitors include Google Inc. and Microsoft Corp., cut prices for its Amazon Web Services unit this year, Chief Financial Officer Tom Szkutak said on a conference call.

Cloud Performance

While Amazon doesn’t disclose specific sales for Web services, it’s a part of the “other” category in financial statements, where revenue in the second quarter declined by 3 percent to $1.17 billion from the prior period.

“We had very substantial price reductions,” Szkutak said.

Shareholders have largely continued to back Bezos’s view that big investments are necessary to gain share because Amazon’s business opportunity is enormous and will pay off in the long run. Amazon is the second-highest valued company in the Standard & Poor’s 500 Index, trading at 573 times earnings and trailing Vertex Pharmaceuticals Inc.

CEO Strategy

Amazon’s lack of profits stands in stark contrast to Alibaba Group Holding Ltd., which has better margins and is planning an initial public offering soon. The Chinese Web retailer disclosed in a prospectus in May that its profit totaled $2.8 billion for the nine months ended Dec. 31 on revenue of $6.5 billion. Amazon earned $274 million for all of 2013 on sales of $74.5 billion.

Photographer: Simon Dawson/Bloomberg

Employees push empty carts as they prepare to process customer orders ahead of shipping at one of Amazon.com Inc.'s fulfillment centers in Rugeley, U.K. Close

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Employees push empty carts as they prepare to process customer orders ahead of shipping at one of Amazon.com Inc.'s fulfillment centers in Rugeley, U.K.

The loss in the latest period was the biggest since the third quarter of 2012, when it posted a $274 million loss.

Amazon is in an investment cycle that benefits customers and will eventually end, said Szkutak, without specifying when that will be.

“We have a tremendous amount of opportunity,” he said. While it’s impacting short-term results, he said “we’ll obviously be looking to get great returns on invested capital.”

Looking ahead, Amazon projected sales of $19.7 billion to $21.5 billion for the current quarter. Operating losses are projected to be $810 million to $410 million, Amazon said.

Amazon didn’t give an update on its dispute with Hachette Book Group over digital-book sales. Both are seeking a greater share of e-book income, and Amazon blocked pre-orders for some of Hachette’s books earlier this year, including “The Silkworm,” a new novel by J.K. Rowling, writing under the pseudonym Robert Galbraith.

Photographer: Mike Kane/Bloomberg

Jeff Bezos, chief executive officer of Amazon.com Inc., speaks after unveiling the Fire Phone during an event at Fremont Studios in Seattle. Close

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Jeff Bezos, chief executive officer of Amazon.com Inc., speaks after unveiling the Fire Phone during an event at Fremont Studios in Seattle.

Fire Smartphone

Bezos is spending to take Amazon further away from its roots as an online seller of books. As it makes that shift, the company is increasingly competing with large technology companies such as Apple Inc., Google Inc., Microsoft Corp. and Samsung Electronics Co.

Amazon is shipping this week its Fire smartphone, a $199 handset that lets users take a picture of a product to find and buy it quickly from Amazon. Reviewers have panned the device, citing a weak battery, lack of applications and the gimmicky nature of its 3-D display.

Amazon doesn’t disclose sales figures for devices like its Kindle e-readers and Szkutak declined to provide specific figures about orders for the new smartphone.

Strong sales or not, Bezos has proven with devices such as the Kindle Fire tablet that he’ll stick with a product and continue to invest, even if early models don’t prove popular.

“They keep investing in these incredibly capital-intensive businesses,” Mulpuru said.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

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

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