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 Some on Wall Street wonder if Amazon may have bitten off more than
it can chew. After an unusually busy first half of the year that saw
the online retailer spend on developing everything from mobile
phones and Hollywood-style production to grocery deliveries,
investors are ready to see it curtail its ambitions and start
delivering sustainable profits.
Or at least offer evidence that Bezos' ever-increasing investments
are going to soon generate appealing returns for its main online
retailing business.
"It does get frustrating when they continue to spend quarter after
quarter and they don't let the revenue flow through," said Michael
Scanlon, who manages $3.5 billion at Manulife Asset Management and
holds shares of Amazon. "I'm definitely ready for profits."
Others argue that easing off on the throttle now may thwart its goal
of becoming the Wal-Mart of online retail. That is particularly the
case as China's Alibaba - which handles more ecommerce than Amazon
and eBay Inc combined - slowly develops a U.S. consumer presence and
prepares for an initial public offering in the U.S.
BIG SELLING POINT
Bezos insists on taking the long view. In his letter to shareholders
last year, he responded to criticism about spending by saying
investing in a "just-in-time fashion would be too clever by half."
Its increasing share of the retail dollar is still a big selling
point for investors.
"You have to take a long-term perspective and you have to buy in
that you're going to see solid topline growth," said Needham & Co
analyst Kerry Rice.
But that market share grab comes at a price a price that was
highlighted in its second-quarter results issued on Thursday. Amazon
reported its largest quarterly loss since 2012 as operating expenses
rose 24 percent, led by a 40 percent surge in spending on technology
and content.
Its shares fell 9.6 percent on Friday, wiping out about $16 billion
of value. The company has now fallen short of Wall Street's earnings
expectations in seven of the past nine quarters.
Perhaps worse, it predicted an operating loss of up to $810 million
for the current third quarter, the biggest quarter-on-quarter
reversal in profitability since 2003, B. Riley analysts estimated.
Included is $410 million in stock-based compensation in the third
quarter, but excluded are "acquisitions, investments,
restructurings."
Investors say they are concerned about not only Amazon spending
every dollar that comes in the door but also the lack of disclosure
about where it is being spent.
"Most companies with the kind of gross revenue Amazon has are not
posting these kind of losses," said Michael Yoshikami, CEO of
Destination Wealth Management, which sold its stake in Amazon last
year. "You've got to give more information to justify faith in the
name."
But Amazon has always kept its data close, even basic details such
as how many Kindle tablets it has sold or the precise number of
subscribers to its Amazon Prime free shipping and media service,
citing competitive reasons.
Scanlon said that greater disclosure "would help you do things like
measure return on investments. You can start to get your arms around
more what the duration of the spending will be."
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TOUGH TO SWALLOW
Two areas that have proven hard for some to swallow are a panoply of
new devices based on a heavily modified and less-established version
of Google's Android, and Amazon's move into program production.
This week, Amazon launched the $649 Fire Phone, but it failed to
impress reviewers. The phone joins a Fire streaming box and a line
of tablets and e-readers - most sold at prices close to their cost
to produce and get to market - in its drive to galvanize sales of
digital books and media.
Amazon's foray into TV - from "Alpha House" starring John Goodman to
just-announced kids show "Annedroids" - has never garnered
Netflix-like acclaim. Yet it intends to devote more than $100
million to original video content this quarter.
"There's a lot of stuff they're doing that's questionable," said S&P
Capital IQ analyst Tuna Amobi, who has a "sell" rating on Amazon,
referring in particular to Amazon's content and hardware endeavors.
Investors might be soothed if Amazon did a share buyback, Scanlon
said, adding it was unlikely. While Amazon has more than $5 billion
of cash and cash equivalents as of June, analysts say there's little
percentage in Amazon buying its own shares, given their lofty
valuation even after a slump this year.
Some assessments tag Amazon's shares with a highly-overvalued
warning sign.
According to Thomson Reuters StarMine, Amazon’s shares carry an
intrinsic worth of $36.37 – or about a tenth of its current price –
making the stock one of the most overvalued names in its universe of
more than 4,000 U.S. companies. StarMine calculates its intrinsic
value figure using growth expectations for the coming decade, and it
suggests that at its current price, investors are discounting a much
faster growth rate than Amazon could hope to achieve in coming
years.
B. Riley, which downgraded Amazon to neutral from buy on Friday,
argued it was hard to justify its valuation given "compromised cash
flows."
"There's nothing wrong with spending to diversify your business, but
it has to be a focused manner as opposed to throwing spaghetti on
the wall and seeing what sticks," Amobi said. "They're a public
company, they need some sensitivity" to shareholders.
(Additional reporting by Ross Kerber in Boston and David Gaffen in
New York, editing by Edwin Chan and Martin Howell)
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