Amazon: Bet on Bezos

by David Sandell, contributing editor Leeb's Income Performance Letter

Amazon.com (AMZN) has been making massive investments in its future at the expense of short-term results.

With Jeff Bezos — one of tech’s few remaining visionaries — at the helm, we’re willing to bet the online retailer will succeed in its far-reaching strategy.

In 2011’s third quarter, Amazon’s revenues at $10.9 billion came in 44 percent higher than in the year-earlier period and were just a shade below what analysts had forecast.

Profits, however, were a bleaker story: net income was just $63 million, down from $231 million in the like quarter a year earlier and only around half of what analysts were expecting.

Increased shipping costs contributed to the profit miss. The major cause, however, was a big rise in capital expenditures aimed at building up the company’s infrastructure so as to lay the groundwork for future growth.

For starters, Amazon added 17 new fulfillment centers (two more than had been expected this quarter) as it expands its capabilities.

This represented a big expense, but the centers are only part of the company’s ambitious expansion program: earlier in the year it had announced it would add a total of 50 new centers in 2011, almost doubling its existing base of 52 centers. Moreover, the new centers also entail higher payrolls, further adding to costs.

Second, Amazon has spent heavily on the development and production of its new tablet offering, the Kindle Fire.

The $199 tablet will be a loss leader for the company, as Amazon looks to gain market share by losing on the upfront sale of the device.

The plan is to compensate for the losses through high-margined sales of e-books and other online products that consumers can order through the device.

All the above costs, along with the expectation of losses from the Kindle Fire once sales of the device begin, have added up to very sober earnings guidance for the fourth quarter.

In fact, even with revenues expected to continue to grow sharply, perhaps again by 44 percent year over year, Amazon has prepared investors for the possibility of an unprofitable quarter: it projected net income anywhere from a loss of $200 million to a profit of $250 million.

Shares are expensive on a P/E basis (and will get more expensive if the company reports a loss), but we still think they represent good value as one of the last standing dot.com giants prepares for its next leg of dominance and growth.

Learn more about this financial newsletter at Leeb's Income Performance Letter.