“Amazon didn’t produce earnings for years and, despite the prognostications of clever people…has grown into a major force in retailing. Trying to manage your company to keep Wall Street happy is a sure path to oblivion. The retail graveyard is brimming with managers who tried.“ - Bill Emerson, President, Emerson Advisors
It’s been a big week for Amazon.com. The world largest online retailer reported a 73% drop in quarterly profit, and Wall Street responded by pulling down the stock by 16% to below $200 – this rebounded to $217 by market close on Friday, nevertheless representing a nearly $8 billion loss in market cap. Despite this, I remain overwhelmingly bullish about Amazon.com’s future prospects as detailed in a previous post. Other news from last week that has reinforced this belief is additional insight into Amazon’s Kindle strategy and the retailer’s continued international expansion.
Let’s start with the Kindle Fire. Leaked internal forecasts from Amazon indicate that the retailer expects $2.5 million preorders by Nov. 15th, when the device goes on sale. In contrast, the original iPad and iPad2 sold 1 million units and 2.5 million units respectively, in the first month of sale. Okay, so Kindle sales will likely be great this holiday season, but what about margin? Research Firm IHS and others estimate that Amazon loses $10-$25 on every Kindle Fire sold. Not good…until we remember that the device is a Trojan horse to grab market share in physical goods sold and content delivery (Amazon makes money on merchandize and to a lesser extent on content, not necessarily the device itself). While a significant chunk of the retailer’s worldwide revenue still comes from media, the superstore’s future strategy seems to be to use the device to grow market share across the 40 categories that account for more than 50% of its revenue, from apparel and beauty to non-perishable food items. Makes sense considering these categories are outpacing media in growth. Small wonder then that even Barnes & Noble is looking to follow in Amazon’s footsteps, as demonstrated by BN’s expansion into non-book categories.
Then there is Amazon’s international footprint. Not only does Amazon ship to most countries, but it also had the foresight to establish country-specific fulfillment networks and country-specific websites early in the game – a tactic that most bricks and mortar retailers are only just beginning to consider. Launched in 2004, Joyo Amazon (Amazon’s China subsidiary) has been Amazon’s fastest growing market with a population that is four times the size of the U.S. And the retailer just renamed Joyo Amazon as Amazon China.
Finally, lest we forget – the real reason that Amazon.com reported a 73% drop in quarterly profit is because of a massive investment in its fulfillment network. I’ve talked before about how Amazon’s fulfillment strategy and operational efficiency is core to the company’s success; this quarter’s investment bears out the retailer’s commitment.
In sum, last week has demonstrated again that Amazon.com is one of those rare companies that is willing to take a near term hit on stock in order to create long term value. And that definitely rates as a strong buy in my book.
Disclaimer: I am not, nor have ever been, a financial analyst. I am also not recommending that others should buy Amazon stock, merely stating why I will.