Is Amazon up a creek?

Lackluster earnings will linger as the company invests for the long term.

By Jonathan Berr Jul 27, 2012 11:46AM
Amazon logo copyright Emmanuel Dunand/AFP/Getty ImagesAmazon.com (AMZN) had a subpar quarter and sees more pain ahead for shareholders.

The Seattle company reported Thursday that net income in the last quarter plunged 96% to $7 million, or 1 cent a share, its steepest drop since 2002, according to Bloomberg News. Revenue rose 29% to $12.8 billion. The results lagged analysts' estimates of a 3-cent profit on revenue of $12.9 billion. 

To make matters worse, Amazon forecast a third-quarter loss of as much as $500 million -- compared with Wall Street's expectations of a $119.6 million gain -- while sales in the current quarter are estimated at $12.9 billion to $14.3 billion. Analysts expected revenue of $14.1 billion.

Shares of the largest e-tailer, which rebounded Friday after plunging after-hours Thursday following the earnings report, will continue to be under pressure for some time. First, as Bloomberg noted, CEO Jeff Bezos is investing for the long-run and plans to open 12 more fulfillment centers this year, in addition to the six it already owns. Bezos also is planning to spend more money improving the Kindle. There are also some tough economic headwinds. 

Weak consumer spending caused U.S. GDP growth to slow to 1.5% in the last quarter, which though not as bad as some feared, is still rather anemic. Consumer sentiment fell to its lowest level last week in two months. While this was expected, it is another worrisome sign about the fragility of the economy. If that pessimism lingers into the fourth quarter, that could mean trouble for Amazon and other retailers that make most of their profits during the holiday season.

Amazon may be down but it's far from out. Wall Street still has faith in the stock. Analysts have an average 52-week price target of $260.14 on the stock, about 12% higher than where it currently trades. The stock, however, isn't cheap, trading at a price-to-earnings ratio of 269.07, the highest it's been in five years.

For most investors, the risks associated with Amazon are greater than its rewards.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr.
Tags: AMZNearningsJonathan Berr
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