Amazon.com finally produced a set of quarterly earnings that Wall Street could cheer again on Tuesday, following a string of disappointments that have added to doubts about the long-term potential of its fundamental business model.
Despite the better news, however, the latest figures continued to show evidence of the profit margin erosion that has bedevilled the company over the past year, as it has cut prices and spent more on shipping and technology to maintain sales growth.
Amazon’s shares jumped by more than 11 per cent in after-market trading on Tuesday after it reported a stronger than expected jump in sales in its third fiscal quarter and issued a solid forecast for the final months of the year.
By comparison, its shares suffered immediate falls of at least 10 per cent after three of its four preceding earnings reports. The biggest drop, of 22 per cent, came three months ago, when even some of Amazon’s strongest Wall Street supporters slashed forecasts for the company.
Revenues in the latest quarter rose 24 per cent to $2.31bn, above the $2.25bn most analysts had expected. The company said it expected sales of $3.625-$3.95bn in the important final quarter of the year, the midpoint of which is some $100m above outside estimates. The stronger revenue outlook eased concerns about the company’s underlying growth prospects.
As expected, though, higher shipping costs and lower selling prices ate into profitability, reducing gross profit margin to 23.8 per cent from 24.9 per cent a year before. Higher technology costs, meanwhile, contributed to a fall in the pro forma operating profit margin to 3.1 per cent, from 6.5 per cent the year before.
Amazon has argued that the higher spending has been needed to build a technology platform capable of supporting its broader ambitions, including its move into digital media. The company’s attempt to build a new business around hosting other e-commerce companies on its platform has proved controversial on Wall Street, given the cost.
However, Jeff Bezos, chief executive officer, said: “These are assets and skills that we need to build for ourselves anyway.” He also said that, after the run-up in technology costs in the recent quarter, Amazon would start to “grow into that investment”, even as costs continue to increase.
Net income for the latest quarter fell to $19m, or 5 cents a share, from $30m the year before.