Alarms Sound Over Amazon Spending Pace

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July 25 (Bloomberg) -- Oppenheimer Internet Analyst Jason Helfstein and Bloomberg’s Paul Sweeney discuss Amazon’s earnings on “In The Loop.” Helfstein owns no stock in Amazon. (Source: Bloomberg)

North american research.

Also joining us is jason, an analyst at oppenheimer.

Why do investors seem to care now?

We've known they want to operate at a loss?

This is the second quarter in a row where the stock has reacted negatively to quarterly earnings.

Investors on the margin -- their patience is wearing thin with the investment at all costs and topline growth at all costs, at the expense of profit.

It is an issue that management is starting to think about.

They are starting to play hardball with some of their suppliers, for example on the media side, with hachette.

Even with that, they want to -- they don't want to raise prices.

The ceo -- cfo made no bones about it.

They will continue their investment in the company.

They feel extremely bullish long-term about the story of e-commerce globally.

If i look behind the words and numbers, it seems like the cloud computing business is where amazon is starting to feel some pain.

Does that reset expectations for that part of the business?

It is now going to take several quarters to run through the numbers.

If you had a business that was previously growing roughly around 60%, it is now going to grow just 30% with partial cuts on the quarter here and we are probably talking about that segment growing in the 20's for a few quarters before it really accelerates -- before it reaccelerates.

It's entirely possible they could win more share with these price cuts, but that being said, this is their highest margin business line.

I would point out that it does look like they are trying to raise margins, whether it is for prime price increase, the full price phone, the full price fire tv, but all of these initiatives take time.

And you do have an outperform rating on the stock.

What do you feel most optimistic about?

It is still clear they are gaining share.

One of the metrics we like to look at is if you break down the e-commerce business and look at the gross profit per customer, that is still growing in the 10% range.

If you think about what is overall retail spending growing, 2%, 1%, depending on the geography, they are still growing at 10x of what the overall environment is growing.

They are still gaining share.

The reality is they are not making much money when they do it.

When you look at the company, which is effectively two companies, web service and e-commerce, and if you put a 7-tiomes -- 7-times multiple on it, right now, in the markets putting 25 times on the e-commerce business, assuming they could hypothetically get back to a 6% margin am a we think that is a very reasonable -- that is very reasonable to pay for that type of growth.

That's assuming they can get back to that kind of margin.

It seems like the expectation was jeff bezos would stop spending and work on margins.

It seems like the worry is he is not going to do that at all and keep investing in different businesses, like drones, for example.

Given that they don't give annual guidance, it does make the profit picture look as worse as possible.

I understand investor concerns.

If you look at the long-term, they are still gaining share.

Are you investing for the short term or the long term?

We were looking at the operating loss that amazon is looking at this quarter and it could be as high as $810 million.

What about alibaba?

When alibaba comes into the market, when they start the roadshow, they will step back and say, let me compare the margin of amazon, ebay, alibaba.

I think that will shine a harsher light on the amazon story and may put pressure on management to step back.

I suspect investors will put some pressure on management to take a look at the profitability in that business.

Management believes in the long-term growth story of e-commerce.

We think it is only 6% or 7% of retail sales today.

Could it be 10% or 12% five years down the road?

I think they think the answer is yes.

It could make sense to invest long-term today.

At what point does the lack of profit that we see no longer justify $150 billion market cap?

If you got to a point where this company is growing sales at less than 20%, i think at that point, probably investor frustration -- at this point, you should be generating profit.

The reality is that the company could show whatever margin they wanted overnight.

You have seen this massive transition from physical media to digital media.

They are probably not holding their share within digital media . part of it has to do with -- making it easy for consumers to purchase digital goods.

I think there are a number of factors at play.

They are trying to figure them out for the long-term.

Right now, it is not driving the business as much as it had been 12 months or 24 months ago.

The amazon fire phone goes on sale today.

Are you buying one?

I'm probably going to take a pass on that one.

I tend to not buy the first of a new model of device.

Amazon believers, but maybe not so much in the phone.

Thank you so much.

We are going to move overseas to ukraine.

Military positions are under bombardment and the u.s. is pointing the blame at russia him

This text has been automatically generated. It may not be 100% accurate.

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