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Last updated: October 27, 2011 5:13 am
Analysts have begun slashing their forecasts for Amazon’s earnings next year as investors struggle to gauge when its profit margins will start rising, after it forecast a potential operating loss this quarter.
Barclays Capital cut its forecast for Amazon’s earnings per share in 2012 to $2.04 from $3, and Credit Suisse analysts cut its forecast to $2.26 per share from $2.90 on Wednesday, while other analysts criticised Amazon for a lack of transparency.
Amazon’s shares fell nearly 13 per cent from where they stood before it reported its results on Tuesday, reaching $198.40. That share fall exceeded the decline in after-hours trading that followed its earnings announcement.
In spite of the 13 per cent share price fall, the revised earnings estimates from Credit Suisse and Barclays Capital give the company a valuation of 88 and 97 times next year’s forecast earnings respectively.
The online retailer’s warning of a possible operating loss as large as $200m, due to new investments, emboldened sceptical analysts and forced the company’s admirers to defend their views.
Colin Sebastian, analyst at Robert W Baird, said: “Amazon had higher margins at a smaller scale, so there’s a lot of concern about whether things are getting out of hand with all these investments. Does management really have a handle on this?”
Amazon has provided no information on the big investments that analysts presume it has made in the Kindle Fire, its rival to Apple’s iPad, which will begin shipping on November 15.
The company is also investing in 17 new distribution centres.
Mr Sebastian said: “I think part of the issue is that Amazon itself hasn’t really [told] investors what the time frame is for these investments. At what point can it take its foot off the pedal and realise margin expansion?”
Jeff Bezos, Amazon’s founder and chief executive, said in a statement that, due to Fire pre-orders, the company was “building millions more than we’d already planned”. Analysts expect it to sell the device at or close to a loss.
Colin Gillis, analysts at BGC Partners, said: “The question that’s not been included in the Amazon dialogue is whether there is anything broken in this model. Now that’s starting to be inserted.”
He added: “Investors should be concerned over the lack of visibility the company is giving on key parts of the business.”
In spite of the 11 per cent share price fall, the revised earnings estimates from Credit Suisse and Barclays Capital give the company a valuation of 89 and 99 times next year’s forecast earnings respectively.
Referring to its high valuation and habit of not disclosing detailed sales data, Mr Gillis said: “You’re going to pay a premium and you don’t know how many Kindles they sold?”
The company’s admirers say that it has consistently proved that it is able to convert big investments in new products and services into profit growth as well as sales.
Amazon forecast another quarter of rapid revenue growth in the three months to the end of the year with sales rising between 27 per cent and 44 per cent to $16.5bn-$18.7bn.
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