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Amazon Continues On Without Profits

Posted on Tuesday, May 6th 2014

According to market reports, online retail giant Amazon (Nasdaq: AMZN) accounts for nearly 2% of global retail sales. However, while they may continue to rake in revenues, Amazon is still struggling with turning profitable. Amazon envisions profitability only by the end of the decade. Till then, they are operating on narrow margins while investing in services to garner higher market share.

Amazon’s Financials
Amazon’s first quarter revenues grew 23% over the year to $19.7 billion, ahead of the Street’s target of $19.42 billion. EPS of $0.23 was also ahead of the Street’s projections of $0.21 for the quarter.

By segment, revenues from products grew 18% to $15.7 billion and revenues from services grew 44% to $4.04 billion. During the quarter, sales from North America grew 26% over the year and other international markets improved 18% over the year.

For the current quarter, Amazon projected revenues of $18.1 billion-$19.8 billion, falling short of the market’s projections of $19.01 billion. Amazon is still not expecting operating profits and instead projected an operating loss of $55 million-$455 million.

Amazon’s Expanding Offerings
Till recently, Amazon had been able to avoid collecting state taxes in several laws. Earlier rulings required that if the company did not have a physical location in a state, they did not have to pay state taxes. But recently, 20 states have passed laws that will require them to collect sales taxes. A study at Ohio State University found that the sales tax collections will cause Amazon’s customers to spend about 10% less per order and will lead to a 2% increase in sales made at brick-and-mortar outlets. Additionally, the tax is also expected to result in a gain of nearly 20% at competing online retailers. 

Meanwhile, Amazon keeps investing heavily in alternate service offerings to counter such setbacks. They recently released Fire TV, a set-top box that connects to a HDTV to simplify and expedite Internet access for its users. The box allows users to connect to services like Netflix, Prime Instant Video, Hulu Plus, WatchESPN, Showtime Anytime, and other low-cost video rentals available on Amazon’s site. Besides TV shows, Fire TV also provides access to video games including games from EA, Disney, Amazon Game Studios, and more. Fire TV comes with innovative features such as a voice search capability to find movies and TV shows and provides recommendations to users based on their TV and video viewing history. Amazon also entered into an agreement with HBO Go to make the service available for Fire TV by the end of the year.

For their Prime customers, Amazon raised their Prime fee from $79 annually to $99. The revised rates will be applicable for new and renewing subscribers. Amazon has, in return, increased the library of titles and services available to Prime users. Streaming on Prime Instant Video service has already tripled over the year. Amazon’s recent agreement with HBO will strengthen that more as Prime Instant Video will become the exclusive online-only provider for select HBO programming, including bit hits like The Sopranos, Six Feet Under, The Wire to name a few. Prime Instant Video is also the exclusive online-only subscription service for FOX’s 24, BBC America’s Orphan Black, FX’s The Americans, and MTV’s Teen Wolf. Amazon also introduced the Prime Instant Video Streaming service to their customers in the UK and Germany.

Besides Video Streaming, Prime members are also able to benefit from additional features such as same day delivery. They expanded the service now to reach 12 cities including Dallas and San Francisco. Prime members will have to pay a service fee of $5.99 for up to about 150 pounds of same day delivery products compared with a fee of $9.98 for the first item and $0.99 for each additional item paid by Non Prime users. They introduced Prime Pantry, an online grocery store to let Prime Members complete their grocery shopping through Amazon. The service lets members buy products in quantities of their choice, instead of requiring them to make bulk purchases. Shipping is charged $5.99 per box.

Amazon is also rumored to be working on releasing their smartphone. The phone is expected to feature six cameras with four positioned across the face to enable features such as 3D images and ability to use gestures for the OS. The phone is projected to be released this year and Amazon hopes to be able to capture a bigger share of the mobile device market through its release. But analysts are concerned about Amazon’s plans to enter an industry which is fraught with intense competition from Apple and Google and requires significant investments in development, distribution, and continuing research and development. Both Apple and Google are highly profitable companies with massive amounts of money available for R&D. Amazon, in contrast, is a low-margin business. How will they keep up?

Amazon’s stock is trading at $308.01 with a market capitalization of $141.7 billion. It touched a 52-week high of $408.06 earlier this year. So far, investors are letting them carry on without turning in profits. How long will that carry on?

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