Amazon and its investors are in a race to get the joke about earnings. Founder Jeff Bezos has long prioritized growth over profit. Yet the internet retailer’s latest quarterly results hint at how margins can improve as sales slow. Charging more for Prime membership could improve them further. Problem is, investors are counting on both growth and higher margins.
Earnings for the three months to December were respectable by Amazon’s standards. Revenue increased 20 percent compared to the same period in the previous year. And the company generated $239 million of net income.
Its operating margin rose to 2 percent. That’s not enough to justify Amazon’s $184 billion valuation, which leaves it trading at more than 150 times estimated consensus 2014 earnings. But shareholders have shown a remarkable ability to put faith in Bezos’ long-term outlook despite meager returns.
How ironic, then, that their reaction to what was a gentle stab at proving the boss right was to drive the stock down 5 percent in after-hours trading. Granted, the company’s outlook for the first quarter was hardly robust – but the first three months of the year are often sluggish.
Worse, investors appear to be fretting about Amazon’s plans to raise the cost of Prime membership. The service, which provides free two-day shipping and servers-full of streaming digital content, has at least 20 million users, according to Macquarie. And the company claims it’s an effective means of generating more online shopping.
Costs are rising, though, so it’s smart to raise the price – the first time since the program’s inception nearly a decade ago. That may lose it some members, but even if revenue grows less quickly as a result, the net effect should be more net income.
Amazon could, thanks to all its digital services, eventually crank out net margins higher than Wal-Mart’s 4 percent. Let’s be exceptionally generous and assume it hits 6 percent in 2015, from what is basically breakeven now. Amazon would still trade at more than 30 times earnings. That’s still a rich multiple.
Bezos is starting to show that he can deliver a bit better profit with a bit less growth. For as long as shareholders put too much store in a bulging top line, though, he’ll find pleasing them will be increasingly hard to do.