Why Is Amazon Confident Despite Its Losses?

by Sohini Bagchi    Jul 25, 2014


Amazon is known as an organization with boundless ambitions. While in the recent past, the company has been keeping itself busy with the rapid pace of investment in new businesses such as digital content and consumer electronics, it posted its widest loss since 2012. While its cloud-computing business showed signs of reluctant growth, many believe the new investments it has made in areas such as new distribution warehouses and gadgets is holding back its profitability. Despite the losses, the world’s largest online retailer is confident, terms it as a short-term impact, which may have long-term gains and believes in more investment and expansion.

A short-term loss

Amazon had a second-quarter loss of $126 million, wider than analysts’ $66.7 million average estimate and a $7 million loss a year earlier. Its shares fell another 10 percent in late trade, after it posted a loss of 27 cents per share, nearly double Wall Street’s average estimate for a loss of 15 cents. Sales climbed 23 percent to $19.3 billion, while operating expenses increased 24 percent to $19.4 billion, Amazon said in a statement today.

Chief Executive Officer Jeff Bezos’s strategy since inception has been to invest heavily to expand and earn customer loyalty. While it gave them the leeway to explore different avenues, from bookstores to electronics outlets and providing of Web-computing software, the approach was undoubtedly expensive.  As a New York times report states that profit — or the lack of one — remains a closely watched metric along with overall sales for any company. BGC Partners analyst Colin Gillis believes, “It’s a feat to lose money with $20 billion in net revenue,” something investors would be disappointed.

Read: Should Amazon Worry About India’s E-marketplace?

But not all analysts think that way. While Amazon began posting quarterly losses in 2012 after being consistently profitable for almost a decade, Sucharita Mulpuru, an analyst at Forrester Research in Cambridge, Massachusetts stated in her blog, “As long as there is money to pour into the business, they will be pouring money into the business.” She added that if you can spend down all your profit and nobody is going to penalize you for it, why show a profit?

Amazon officials too exude confidence despite the loss. “We’re not trying to optimize for short-term profits,” Thomas J. Szkutak, the chief financial officer, said in a conference call.

They are banking on the 23 percent rising sales from $15.7 billion in the period a year earlier. The Seattle based retailer, hand-held grocery-ordering device, unlimited e-book rental and streaming services, and its first set-top box and smartphone. A WSJ report notes while one of its most promising businesses, its cloud-computing or Amazon Web Services division suffered a slowdown in growth hitting the bottom line, Executive Jeff Bezos asserted that the AWS division could one day overtake its core retail division by revenue.

A wait and watch approach

Requesting analysts and industry watchers to adopt a wait and watch approach, Szkutak said, while there has been some short-term impact these would clearly reflect a long-gain. The company for example said it is investing in expanding geographically in China, Spain, India and other markets where it sees “opportunities”. As Szkutak mentioned, “We are encouraged by the sheer magnitude of opportunities we have and are investing in those opportunities,” while at the same time working on its offering, alongside service delivery. Amazon’s wider strategy is to reach more people and connect with them at more points in their lives, Daymon Worldwide vice president of consumer strategy Virginia Morris told Reuters. “It is much more about being everything for every consumer, and the profitability will come,” Morris said. Bezos said he is spending to take Amazon further away from its roots as an online seller of books. As it makes that shift, the company is increasingly competing with large technology companies such as Apple, Google, Microsoft and Samsung.

Amazon is set to ship its Fire smartphone, a $199 handset and despite reviewers already panned the device, citing a weak battery, lack of applications and the gimmicky nature of its 3-D display, Mulpuru notes they will keep investing in these incredibly capital-intensive businesses.

Some other too believe, strong sales or not, Bezos has proven with devices such as the Kindle Fire tablet that he’ll stick with a product and continue to invest, till it gets popular.