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Amazon's Cold Fire Phone Inflames Investors

By Erika Morphy
Oct 24, 2014 1:51 PM PT
Fire With Firefly

Amazon on Thursday posted a net loss of US$437 million for the third quarter, or 95 cents per diluted share. For the same period in 2013, it posted a net loss of $41 million, or 9 cents per diluted share.

Amazon had warned shareholders when it reported its bleak second quarter performance in July that the next quarter would be equally grim. However, that did not keep investors from reacting in surprise and dismay when the Q3 report arrived. Shares dropped 10 percent on Friday.

Not all of the news was bad. Net sales increased 20 percent to $20.58 billion in the third quarter, compared with $17.09 billion in third quarter 2013. For the fourth quarter, Amazon expects net sales to be between $27.3 billion and $30.3 billion -- a growth rate that will range between 7 percent and 18 percent compared with fourth quarter 2013.

It's not clear how long the bleeding will continue. The company's forecast for the fourth quarter ranges from a possible operating loss of $570 million to a potential $430 million profit, compared with its $510 million profit in the fourth quarter 2013 and its $544 million loss in the quarter just ended.

When releasing the numbers, CEO Jeff Bezos paid little attention to the red ink, preferring to focus on the upcoming holiday shopping season.

"We are focused on making the customer experience easier and more stress-free than ever," he said. "In addition to our already low prices, we will offer more than 15,000 Lightning Deals with early access to select deals for Prime members, hundreds of millions of products across dozens of categories, curated gift lists like Holiday Toy List and Electronics Holiday Gift Guide, new features like #AmazonWishList, and a great new lineup of products like Kindle Voyage and Fire HD Kids Edition."

High-Class Problems

Bezos also made no mention of the Amazon Fire Phone, which resulted in unsold inventory and a $170 million writeoff.

To a certain extent Bezos is entitled to focus on the positive.

"Keep in mind that some of Amazon's problems are high-class ones," Barry Randall, technology portfolio manager for Covestor, told the E-Commerce Times.

"Amazon's third-quarter revenue shortfall was due in part to an accounting quirk: They sold more third-party merchandise than expected; this is product for which Amazon doesn't recognize revenue and expense, only a margin contribution. But it's still Amazon making a sale and possibly a happy new customer."

Amazon's new Fire Phone is a bust, Randall acknowledged, "but Amazon Web Services is now a billion-dollar business growing in excess of 30 percent annually, which only supports Bezos' desire to spend big to get big."

Primed for Success

Investor pressure on Amazon to shift strategies is mounting, however, and likely will continue to do so if the company reports losses every quarter.

Bezos is unlikely to cave, though, said Val Wright of Val Wright Consulting.

"Jeff Bezos has never cared what investors think and isn't going to start any time soon," she told the E-Commerce Times. "His obsession is with customers, and he rapidly grows the business by his fanatical focus on customers."

Also, despite the current financial picture, Amazon has positioned itself well for long-term growth, Wright said.

"Amazon consistently hires two years ahead -- they bring in industry experts to break into new markets and catapult new investment ideas," she pointed out.

It also is not afraid to invest for growth -- although admittedly that is a reason for discontent with shareholders right now, Wright said.

This year Amazon has acquired Twitch, expanded its grocery delivery service AmazonFresh, and launched a credit card reader, a set-top box and the new Fire Phone.

"That is a phenomenal set of achievements in a year," said Wright.

Amazon's culture also is primed for success, she observed -- precisely because the company doesn't blame its employees for its failings.

"There will be no repercussions at Amazon today in the Fire division for the $170 million writeoff -- that isn't how the Amazon culture works," Wright explained. "Failure is tolerated, and [employees are] encouraged to talk about what could be improved and how the customer experience can be enhanced."

There is no blame game played at Amazon, she emphasized.

That is not the case, though, among shareholders and analysts.


Erika Morphy has been writing about technology, finance and business issues for more than 20 years. She lives in Silver Spring, Maryland.


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