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Amazon Earnings: Why Its Razor Thin Profits Don't Matter to the Market

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Amazon.comAmazon (AMZN) just released its fourth-quarter earnings report late Tuesday afternoon, announcing that it had racked up $21.27 billion in sales for the quarter -- an increase of 22% from a year earlier.

Oh, and for all those billions, it managed to squeak out a meager $97 million in profits -- a margin of less than half a percent. And for the first quarter of 2013, it projects somewhere between a $65 million profit and a $285 million loss.

The average consumer might be surprised to learn that Amazon, for all its dominance of the retail landscape, doesn't actually have particularly strong profit margins. For the last several quarters, it's had minuscule operating margins of around 1 percent to 2 percent, and in the third quarter of 2012, it took a loss of $274 million -- in a quarter that it made close to $14 billion in sales.

It's true that Amazon and other online-only retailers beat bricks-and-mortar on price by avoiding the overhead costs associated with physical stores. Still, when you're offering the lowest prices and then shipping for free, there's no way you're going to earn huge margins. And more to the point, Amazon is hardly expense-free: Much of that third-quarter loss was associated with money it sunk into its daily deal site, LivingSocial, and it also made investments in technology infrastructure, fulfillment centers and its rapidly growing cloud services business.

In other words, Amazon is investing in the future, and though margins have shrunk, its sales have continued to grow like wildfire. But Amazon's share price reflects a general confidence among investors in that strategy: The stock has rebounded nicely since its previous earnings report in October. And after a sharp, brief dip after this report came out -- Amazon did, after all, fall a bit short of expectations -- its shares are back up in late trading.

Contrast that with Apple (AAPL): It rakes in billions in profits, but has seen its share price plummet in recent months. And it's gotten a bit of guff from some quarters about its unwillingness to dip into its huge cash hoard to make investments of its own or issue regular dividends.

We're not about to wade into the AAPL vs. AMZN fight, but know this: Amazon may not be making money hand-over-fist like Apple, but its place atop the online retail heap is quite secure.


Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.


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Razerface

Market bubble just like the housing bubble. Fed printing money like crazy, proping up the market, just like the Fanny and Freddy did the housing. Look out below!!

January 30 2013 at 9:10 AM Report abuse rate up rate down Reply
lifehub

Looks like AOL has added amazon to their jealousy list lol....

January 30 2013 at 6:01 AM Report abuse rate up rate down Reply
Gloverboy6

If I owned a multi-billion dollar company like Amazon, I wouldn't be concerned about making obscene profits. Jeff Bezos is set for life!

January 30 2013 at 12:08 AM Report abuse rate up rate down Reply
1 reply to Gloverboy6's comment
steffenjobbs

Apple shareholders have become the laughingstock of Wall Street. Apple's raking in the money by the truckloads and shareholders get nothing except heavy share price losses. You'd never know that Apple is the largest company by market cap and could buy Amazon with its reserve cash hoard alone. Apple makes higher profits than Amazon from just the App Store alone. The only cash returns being made at Apple are by Tim Cook and the rest of the top executives. Apple shareholders are getting nada. Apple stock now has no shareholder value and eventually Amazon's share price will probably surpass Apple's. What kind of investor would be stupid enough to buy such a toxic underperforming stock?

January 30 2013 at 1:58 AM Report abuse rate up rate down Reply
kevin243

I own Amzn....and couldn't believe the stock headed up.....greater fool theory at work....will sell when the heard finally figures it out...

January 29 2013 at 11:15 PM Report abuse rate up rate down Reply
bingogeorge4

Peace

January 29 2013 at 10:40 PM Report abuse rate up rate down Reply
bingogeorge4

Peace

January 29 2013 at 10:40 PM Report abuse rate up rate down Reply