Who Says Amazon's Margins Are Rising?

by: Louie Junior posted on: July 14, 2008 | about stocks: AMZN    
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Here's what investors can expect to hear during Amazon's (AMZN) 2nd quarter conference call next week:

  1.  Low prices caused margins to be low.
  2. Q&A will have 793 occurrences of "you know" from Szkutak.
  3. Increased product mix caused margins to be low.
  4. No comment about tax litigation.
  5. Low prices caused margins to be low.
  6. Very secretive about Kindle unit sales but listeners are told it's a huge success.
  7. Goal is to satisfy customers as a "customer-centric firm".
  8. Low prices caused margins to be low.
  9. Bezos wakes-up just prior to last question.
  10. Amazon Prime caused margins to be low.

Using Amazon's own midpoint guidance, we should expect second quarter operating margins to come in around 3.52%. This means Amazon's margins are eroding even further.

The firm focuses all of its energy on increasing the top line -- with free shipping offers and new product offerings such as electronics, groceries, music and now office supplies (all low margin goods). The concept of "same-store-sales" doesn't apply to e-tailers.

Bulls like to say Amazon's margins are improving too -- but that was only because 2006 performance was so ugly. Long term, the margins are falling.

Disclosure: Author holds a short position in AMZN

This article has 6 comments! Add yours below...

Louie Junior

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This article has 6 comments:

  •  
    Tom B
    Jul 14 09:14 AM
    I like AMZN as a customer; wouldn't touch it as a stock. Grotesquely hi P/E, considering. And they'll get gored on that "Kindling" device.

    Tax litigation????
  •  
    jimmy46
    Jul 14 02:13 PM
    @tom
    tax lit?
    NY state is making amzn pay sales tax now, other states are thinking about it. this kills internet sales.

    AMZN is ok for quality, but the "shops" are cr*p.
  •  
    netmargin15
    Jul 15 02:17 AM
    > Who Says Amazon's Margins Are Rising?

    It should be noted that since hitting bottom in Q4 2006, Amazon's trailing-twelve-month operating margin has risen steadily from 3.64% to 4.44%.

    > Using Amazon's own midpoint guidance, we should expect second quarter operating margins to come in around 3.52%.

    Amazon also consistently beats the midpoint. In fact, since Q4 2006, Amazon's operating profit has averaged within 2-3% of the highpoint of their guidance.
  •  
    turb0kat
    Jul 16 03:06 AM
    If you wanted to grow a 30 billion dollar company by 30-40% per year consistently, low margins might be a good strategy. Just sayin...
  •  
    LouieJunior
    Jul 19 09:18 AM
    My Website
    NetMargin1.5

    > They always beat on revenues -- seldom on operating income.
    > Hence the expectation of lower margins.

    turb0kat

    > Okay, give 'em a premium for the revenue growth, but not a high-tech multiple on top of that! Google has similar revenue growth and has 30% operating margins -- its multiple is 33 (ttm). Amazon is a low-margin retailer with multiple of 58 (ttm).
    > We'll see if it's a $30 Billion company at summers end. Guessing not...
  •  
    netmargin15
    Jul 20 04:06 PM
    LouieJunior > They always beat on revenues -- seldom on operating income.

    Obviously, you didn't actually look at Amazon's results relative to their guidance for operating income in coming up with your conclusion. I guess it's easier to just make up facts as opposed to looking it up.

    Q1 2008 - guidance ($155m-$200m) vs. actual ($198m)
    Q4 2007 - guidance ($221m-$291m) vs. actual ($271m)
    Q3 2007 - guidance ($75m-$110m) vs. actual ($123m)
    Q2 2007 - guidance ($65m-$105m) vs. actual ($116m)
    Q1 2007 - guidance ($82m-$122m) vs. actual ($145m)
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