Netflix Tells Amazon: 'Been There, Done That'


AmazonAmazon.com's (AMZN) disappointing quarterly results Tuesday night may seem eerily familiar to Netflix (NFLX) shareholders.

We have an online giant seeing its margins contract as it replaces physical delivery with digital delivery. Revenue's growing. Profitability's shrinking. There's a gasp in the crowd when the dot-com darling reveals that it may post an operating loss during the first quarter of 2012.

Netflix went through this exact painful scenario a couple of months ago, and now it's Amazon's turn to fess up the bad news.

A Quarter to Dismember

Net sales climbed 35% to a whopping $17.4 billion during the seasonally potent holiday quarter, but earnings plunged 58% as Amazon sells low-margin Kindle e-readers and tablets and invests in its fledgling digital delivery platforms.

Despite the disparity, it was actually Amazon's top-line figure that sent bulls scurrying for the exits. Analysts were only banking on a profit of $0.17 a share, but they had expected a heartier $18.2 billion in net sales.

Amazon's guidance for the current quarter calls for net sales to grow at a 22% to 36% pace, just short of where the pros are perched. Its operating profit range for the current quarter rests between a deficit of $200 million and a profit of $100 million. Even if Amazon has historically been conservative in its guidance, it has to hurt to deliver an outlook when the midpoint calls for an operating deficit.

Kindle Shtick

Amazon didn't reveal exactly how many Kindles or Kindle Fires it sold during the period, though analysts have been projecting between 3 million and 6 million units of its $199 Kindle Fire tablets cleared during the quarter. This figure clearly pales in comparison to the 15.4 million iPad 2 tablets that Apple (AAPL) sold during the same quarter, but keep in mind that the Kindle Fire wasn't made available until the middle of November.

Amazon investors have been patient with the leading online retailer since margins first began to deteriorate last year. Everyone understands that Amazon has to practically give its hardware away if it wants to one day reap the chunky profits that are available through the digital delivery of media. If Amazon wants to take on Netflix in premium streaming, it needs to establish the audience of Web-tethered couch potatoes and license the content that folks actually want to watch.

However, an operating loss during this new year's freshman quarter may be difficult to swallow. Decelerating sales growth will also be a sorry sight for those who have been paying a market valuation premium to own a piece of this dynamic dot-com mainstay.

Mr. Market's patience is wearing thin. Netflix could've probably told Amazon that this would happen, but why ruin the ending. They're competitors, you know.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Netflix. The Motley Fool owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, and Netflix, as well as creating a bull call spread position in Apple.

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Amazon could really outdo netflix but they choose to charge too much to view a film or tv show. I usually go with netflix for film and amazon for books, works for me. Amazon does have a chance of taking over from netflix but like I said they refuse to lower thier prices for film entertainment.

February 02 2012 at 11:47 AM Report abuse rate up rate down Reply

I love amazon:)

February 02 2012 at 11:25 AM Report abuse rate up rate down Reply

"Amazon's guidance for the current quarter calls for net sales to grow at a 22% to 36% pace, just short of where the pros are perched."
Isn't that the kind of unrealistic expectations that caused the stock market crash of the 90's?

February 02 2012 at 9:55 AM Report abuse rate up rate down Reply
Brielle & Brady

amazon should be ashamed for what they are doing, i use amazon about once a year for a small purchase and they automatically out of the blue took $79 out of my debit acct for amazon prime, they assumed i wanted it and billed me, i had to go through hoops to get a refund but lost me as a customer because of it, i can only imagine how many people overlook it and just pay it. i hope sales go way down now good luck to all

February 02 2012 at 9:01 AM Report abuse rate up rate down Reply
2 replies to Brielle & Brady's comment
Joe Be

Thanks for reminding me! In the nick of time.

February 02 2012 at 9:51 AM Report abuse rate up rate down Reply

I order from Amazon all the time with an Amazon prime account.

February 06 2012 at 11:15 AM Report abuse rate up rate down Reply
1 reply to Cal62's comment

I meant without an Amazon prime account.

February 06 2012 at 11:16 AM Report abuse rate up rate down

I have gotten a secret jolly over both Netflix and Amazon's Kindle "fiascos." Some of us old folks didn't really understand their programs before they became "disapointments" that were scandalously in the news. I cancelled my satellite TV service, cut up my bookstore discount club card and am now a very happy Netflix and Amazon shopper saving money and enjoying my movies and books without any inconvenience. Bravo to Netflix and Amazon for getting all of this free advertisement for the products/services that are simply wonderful, convenient and inexpensive. Now can someone please do the same thing for us with wireless communication? I would love for one of the big guys to screw up and produce another great deal. In the mean time, I am going to keep bragging to everyone I know about Netflix and Amazon.

February 02 2012 at 7:05 AM Report abuse +1 rate up rate down Reply
Northern Paladin

Of course, if we continue the comparison, Netflix got kicked around last year only to rise up like a Phoenix this year. Their stock went from 246 to 64 and back up to 123 over the course of 6 months. Anyone who bought a lot of NFLX back in December must be a happy camper now.

Amazon has probably been due for an adjustment because their P/E is out of sight, but it also, I think, tells a story of investor confidence in the best-thing-going. Amazon is the Wal-Mart of the internet and nobody's doing what they do better than them. Nobody's even close. And Amazon continues to make smart moves. I expect we'll see a lot more out of them on the frontiers of digital media soon.

Long term, I think Netflix and Amazon are both in great positions. Short term the market will hem and haw over minor details but long term I think we'll see them both continue to grow at a good clip.

February 01 2012 at 7:00 PM Report abuse rate up rate down Reply