Amazon’s Spending Spree Sends Expenses Up and Stock Plunging

Apr 25, 2014 3:27 pm ET

(Updates with other technology stocks in fifth paragraph.)

April 25 (Bloomberg) -- Amazon.com Inc. plunged as much as 10 percent after Chief Executive Officer Jeff Bezos told investors that his spending binge isn’t slowing.

Bezos is pouring cash into warehouses for faster shipments, a grocery delivery service and a TV set-top box to compete with Netflix Inc. and Apple Inc. in streaming. Expenses rose 23 percent during the quarter, limiting profit to 23 cents a share, according to a statement yesterday, in line with analysts’ projections. The company forecast an operating loss for the current quarter of $55 million to $455 million.

“People who are hoping for the profit kick are going to have to wait a long time,” said Kerry Rice, an analyst at Needham & Co. in San Francisco who rates the stock a hold.

The shares fell 9.8 percent to $304.19 at 3:21 p.m. New York time after dropping earlier to $303.13, the lowest in six months. Amazon has lost almost a quarter of its value this year.

That weakness also had a spillover effect on other technology stocks today, with shares of Facebook Inc., Twitter Inc., LinkedIn Corp. and others all down more than 4.5 percent as of 3:21 p.m. in New York.

The Seattle-based company’s forecast spooked investors who have been waiting for the heavy spending to translate into earnings. Bezos is moving Amazon well beyond its roots as an online seller of everything from books to children’s toys. Its cloud-computing business, Amazon Web Services, is used by companies including Comcast Corp. and Pfizer Inc.

“Amazon’s profitability in recent years has been uneven as the company remains focused on investing for growth,” Michael Pachter, an analyst at Wedbush Securities, wrote in a report yesterday.

Fulfillment Centers

Net income was $108 million, up from $82 million a year ago. Total operating expenses increased to $19.6 billion from $15.9 billion a year ago.

In particular, fulfillment expenses climbed 29 percent to $2.3 billion while technology and content costs jumped 44 percent to $2 billion. The spending crimped the company’s narrow operating margin to 0.7 percent, down from 1.1 percent a year earlier.

Amazon has been increasing investment in China, with fulfillment centers and retail to make sure the company has items in stock for customers, Chief Financial Officer Tom Szkutak said on a conference call. The company has also started ramping up spending in Italy and Spain, he said.

To help cover the soaring expenses, Amazon has increased the cost of its fast-shipping membership program, called Prime, by 25 percent. Customers now pay $99 a year, up from $79 previously.

Prime Pantry

Looking ahead, Amazon projected sales of $18.1 billion to $19.8 billion for the current quarter. Analysts were on average estimating $19 billion, according to data compiled by Bloomberg.

The company also unveiled a new grocery service for its Prime members called Prime Pantry, which lets people buy goods in bulk to pack into a box that holds as much as 45 pounds and that can be shipped for a flat $5.99 fee.

Amazon has also been developing a smartphone to vie with Apple’s iPhone and devices that run Google Inc.’s Android operating system, people with knowledge of the matter have said.

In addition, Bezos is making Amazon a force in the media industry. The company this week announced a partnership so Prime subscribers can stream older HBO shows, including “The Sopranos” and “The Wire,” through Amazon’s Instant Video service. That followed Amazon’s introduction of the Fire TV set- top box for watching Internet-delivered programs and movies.

The efforts have Amazon competing more directly with Apple, Netflix and Google, which also are also vying for a piece of people’s home-entertainment dollars.

“Amazon keeps spending like drunken sailors,” said Gene Munster, an analyst with Piper Jaffray Cos., who has the equivalent of a buy rating on the stock.

--With assistance from Ian King and Peter Burrows in San Francisco.