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Low Amazon revenues represent investment, not setbacks
October 26, 2011 | 1:15 pm
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By Chris Meadows
I already touched on Amazon’s low revenue projections in another piece, but to come back and take another look, Peter Kafka has an interesting analysis on AllThingsD. He points out that, while Amazon is taking a revenue hit, it’s not another Netflix (which squandered the goodwill it had built up with its customers with a series of unpopular decisions, and at last count had lost 800,000 customers)—it’s burning money the old-fashioned way, by pouring it into solid, physical plant improvements and manufacturing products that should help it make more money in the future.
A lot of the money is going into Amazon’s old business, CFO Thomas Szkutak explained on yesterday’s conference call — the company is building out dozens of new distribution centers to help it ship all the physical stuff its customers still order. And a lot of the money is going into its new digital business — in particular, the new Kindle Fire.
Though he doesn’t go into the math, it’s pretty obvious if you think about it. If the Kindle Fire costs $150 to make, and Amazon makes a million of them (which is really a pretty conservative estimate given how many of the little buggers it can expect to sell), it has to pay $150 million to do that. And building the three new black-and-white Kindles in quantity will be expensive, too.
But when Amazon turns around and sells those Kindles at a profit ($50 per unit in the case of the Fire), not to mention all the additional books and other media it will sell to people who bought them, it will probably end up looking pretty good in a quarter or two.
Of course, Wall Street can get a little jumpy in the short term, especially in this economy, so I wouldn’t be surprised to see Amazon’s stock prices fall a bit on this news—but the company should still be pretty solid in the longer term.
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Comments:
These arguments would be more convincing if it was not for the fact that profit margins at Amazon have been getting squeezed for quite a while now.
Does this company even turn a profit if the third party sales via marketplace listings are excluded? Fat chance of analysts ever trying to give us some real analysis as opposed to financial potboilers.
The explanation has to wrong. The expenditure to build Fires would not impact earnings: the cost is a cash flow item, but the payments go into inventory (and when the Fires are sold the difference between the released inventory and the sale price goes into profit or loss.)
Plus, as I mentioned in the comments of your previous post on the matter, Amazon’s not putting $50 in its pocket on these things. The cost of manufacturing the device might be $150, but there’s a cost associated with marketing and shipping these things. I imagine that those costs eat up all — and then some — of that remaining fifty bucks.
@Rob, not to mention the costs associated with having and training customer support/tech support folks.
Amazon is playing a very high risk game. It is aiming at market dominance. If competition comes along with generic eReaders and the choice of eBook sources improves considerably, or if Apple decide to turn their serious innovative attention on the market, then things won’t look so rosy for Amazon.