The U.S. economy seems to be dwindling, Europe is trying to avert a crisis, however, at Amazon; life could not be rosier.
Amazon.com Inc. the world’s largest online retailer is growing large at a phenomenal rate. However big is not always beautiful, it is often more expensive.
The Seattle based company has announced the results of a super second quarter. The company’s revenue jumped to $9.9 billion, which is a staggering 51% rise from the previous year.
Nevertheless this kind of growth is usually accompanied by high costs.
Amazon has been adding employees, gobbling up other companies and also racking up potential legal costs related to its growth. The investments and other spending were the reason why Amazon’s net income decreased 8 percent to $191 million in the second quarter, as operating expenses rose 54%. Operating margins were squeezed to 2.0%, down from 3.3% a quarter earlier and 4.1% a year earlier.
The slim margins may not get fatter anytime soon. Amazon forecast that its third-quarter operating income will fall 37% to 93%, to between $20 million and $170 million.
The Green Initiative is Amazon’s best marketing tool. Customers are ditching paper books in favor of electronic versions, namely Kindle. Amazon may have sold more than 8 million Kindles last year, accounting for about 5% of sales.
According to Jeff Bezos Chief Executive, the latest version of the Kindle is the super product of the company for this year. The price of the new Kindle 3G is 25% lower as the company bundles advertisements with the product.
Bezos went on to underscore recent technological developments with their movement into on-demand television streaming and the Cloud Drive for online storage and Cloud Player for streaming music.
If their soon to be released Android tablet can live up to expectations then it is looking like a very good year indeed for Amazon.
This is the strongest growth we’ve seen — both in terms of percentage growth on a dollar basis as well as local currency growth — in over 10 years, Bezos said. Because of that, what we see looking forward is where investing a lot in capacity. He also said Amazon’s spending on infrastructure was a “high-quality problem.”
Amazon’s spending is focused on both physical and digital infrastructure. The CEO said the company will build 15 new distribution centers this year, a number that may grow by “a few more, at least.” He said the company is also adding capacity to its fast-growing Amazon Web Services business and that it is investing in its digital offerings. Amazon sells digital video, music and books online.
Accompanying Amazon’s sales growth are scores of new employees. Amazon said it added 5,300 workers in the second quarter, increasing its headcount to 43,200. That’s up 53% from a year ago, when the company had 28,300 workers.
Spending continues at a fairly aggressive pace and the guidance for third-quarter operating income and earnings looked a bit below what we were expecting, said Fred Moran, an analyst at Benchmark Co. in Delray Beach, Florida. It’s not really a surprise to Wall Street because Amazon’s management has been forthright that they would be reinvesting heavily in the business for an extended period of time. Moran recommends buying shares of Amazon, which he doesn’t own himself.
Investors appear willing to trust Amazon on its spending as long as the company’s sales boom.
Scott Tilghman, a Caris & Co. analyst, said Amazon had shown it could make the most of its investments when it underwent a similar spending period in the mid-2000s. “Unfortunately, in the short run they have to invest in their infrastructure to accommodate those sales, and that’s what we’re seeing now,” he said. He said the question is whether the spending will pay off in the “all-important holiday season” this year.
While that spending is weighing on profit margins, the soaring revenue is pleasing investors, said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco.
We’re seeing continued robust revenue growth, better than expected, he said. Sebastian has an outperform rating on the stock, which he doesn’t own. Amazon is running on all cylinders, despite the pressure on its margins.
Music to the ears
In an effort to compete with music offerings from Apple Inc. and other rivals, Amazon increased the amount of space available to users of its music storage service and began offering a music application that plays songs on Apple’s iPad.
The online retailer has fought attempts by California, New York, Texas, Rhode Island and North Carolina to force it to collect sales taxes on purchases, saying the moves infringe on the federal government’s power to regulate commerce among states. The company cut ties with 10,000 California-based affiliates after Governor Jerry Brown signed a law imposing the tax on Internet retailers with a physical presence in the state.
Amazon is also promoting its online entertainment services. The company reached an agreement with CBS Corp. this month to let customers of its Amazon Prime service watch thousands of episodes of TV shows, including Numb3rs and Medium, at no additional cost. The Amazon Prime program, which provides unlimited two-day shipping, costs $79 a year.
It’s easy to buy a book from the Internet than lug all the way in traffic to a bookstore, Joanne a mother of three told arabiangazette.com. I have three small children, the whole process of driving to a book store and purchasing books can become quite tense. Thereby I always prefer to stay home and order online.
However not everyone seems to be happy buying books online.
James a retired accountant living in Dubai told arabiangazette.com that Going to a paper bookstore, leafing thorough the books and buying, that is a fulfilling experience. His 24-year old grandson immediately disagrees. I don’t want to destroy any rainforests. Thereby my Kindle is my best friend. I can carry it wherever I go and there is a variety to read.
We started out with stone tablets, evolved to paper scrolls made out of papyrus reeds, then after many centuries of evolutions emerged PAPER BOOKS. Which have been around for a long time. Now everything to do with ‘e’ is the new way forward.
Source: WSJ, techflash, techfruit, Bloomberg