Amazon shares plummeted in after-hours trading Thursday to the lowest levels since July 2013, after the company posted a larger-than-expected loss and said that sales during the all-important holiday quarter would be lower than analysts expected.
The cause for the third-quarter losses: a massive write-off for the 4-month-old Fire Phone, and a 40 percent jump in operating expenses for technology and content.
The online-retail giant based in Seattle lost $437 million, or 95 cents a share, much worse than analyst expectations of a 74-cent-a-share loss. And even though sales climbed 20 percent to $20.58 billion, they were still lower than the $20.85 billion analysts expected.
For years, Amazon investors have been willing to accept thin profit margins and even losses as the company invested in new businesses. But they’ve increasingly become dissatisfied with the company’s red ink, and Thursday afternoon, they battered the company’s shares.
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The stock dove nearly 11 percent in after-hours trading to $279.60 a share. During the trading day, before Amazon announced its results, the stock had climbed 21 cents to $313.18. Its stock is now down 31 percent from its all-time high of $407.05 last January.
How did Amazon miss expectations so wildly?
Much of the blame this quarter rests with the Fire Phone. Amazon Chief Financial Officer Tom Szkutak said in a conference call with analysts that the company took a $170 million charge for the device, which has performed so poorly the company cut the price last month to 99 cents with a two-year contract starting from $199.
What’s more, Szkutak noted that Amazon has $83 million in Fire Phone inventory on its books. If sales don’t pick up — and a surge seems unlikely — Amazon may have to write off that inventory as well.
Amazon’s soaring operating expense in technology and content, $2.4 billion in the quarter, also dragged down financial results. Amazon has been plowing money into expanding Amazon Web Services; it just opened a massive new data operation in Germany on Thursday. It has spent lavishly to both buy and produce programming for its Netflix-like Prime Instant Video service.
The company also recently expanded its AmazonFresh grocery-delivery service to New York City. And it’s investing heavily in foreign markets, such as India, China, Italy and Spain.
In previous quarters, as Szkutak noted losses and increased spending, he’d often comment that the company was in “investment mode” in certain markets. In conference calls Thursday with both analysts and journalists, Szkutak seemed to suggest a shift might be in the works for Amazon’s aggressive investment strategy.
“We do have a lot of opportunities in front of us; but we do have to be selective on those opportunities,” Szkutak said.
Whether that means Amazon will dial back its investments, something Wall Street seems to want, is unclear.
“I guess we’ll find out what he means by selective, but I think the (Fire) Phone may be one good example where it may not make sense for Amazon to make incremental investments,” Robert W. Baird & Co. analyst Colin Sebastian said in an email interview.
It wasn’t just the third-quarter results that spooked investors. Amazon said it expects to generate between $27.3 billion and $30.3 billion in revenue in the fourth quarter. Even the high end of that range is lower than the $30.78 billion that Cantor Fitzgerald analyst Youssef Squali had projected for fourth-quarter sales.
The company also said operating income for its fourth quarter would fall between a $570 million loss and a $430 million profit. Squali had forecast $483 million in operating profits.
Szkutak declined to say if the fourth-quarter guidance should be read as an indication of Amazon’s concerns for weak holiday sales. He said it included “appropriately conservative assumptions” and noted that the high end of the range would give Amazon an 18 percent jump in sales.
Separately, Szkutak noted that Amazon Prime continues to grow rapidly, even after the company hiked the price of the service $20 to $99 a year in March. There had been some speculation that the increase would lead to defections from members, who get two-day shipping at no extra charge.
“Since we’ve increased to $99, we’ve have great retention,” Szkutak said. “The program is growing very fast.”
Amazon will only say that it has “tens of millions” of Prime subscribers, though some analysts believe the number tops 40 million.
Szkutak also noted that Prime renewals are higher for subscribers who use the Prime Instant Video service. And customers who have received Prime trial memberships are more likely to convert to paid subscriptions if they use the video service than those who don’t.
“We’re certainly in investment mode there, but we like what we see,” Szkutak said.
Amazon also continues to boost its head count. As of Sept. 30, Amazon employs 149,500 full-time and part-time employees, not including contractors or temporary staff. That’s nearly 17,000 more employees than the company had just three months earlier.