Amazon’s profits hit as it focuses on long-term gains

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Last week Amazon recorded a 73% fall in net profit to $63m (£39.1m) during its third quarter ended September 30 compared with the same period last year, despite sales jumping 44% to $10.88bn (£6.75bn).

Although the results disappointed investors and led to some negative headlines, the figures were within the company’s guidance for the quarter of a decline in net profit between 37% and 93%. Sales were projected to be between $10.3bn (£6.4bn) and $11.1bn (£6.89bn), again within the guidance.

The drop in profit comes as a result of the company’s continued investment in future growth. Investment in the quarter included the launch of four new Kindle products including the Kindle Fire. In effect, Amazon is taking a short-term hit for long-term gain, as acquiring additional Kindle customers will drive up Amazon’s content-based sales in the future.

The figures also reflect Amazon’s investment in future capacity to support its long-term growth, with plans to open 17 new distribution centres by the end of 2011, taking the total to 69. In China, it is building a strong strategy with the development of a new fulfilment centre, the renaming of its website and plans to launch the Kindle (pending negotiations with regulators.) While a drop in profits is never good news, the company’s top-line growth of 44% in both domestic and international markets remains outstanding. We are expecting Amazon’s growth to continue (average growth over the past five years has been more than 30% annually) and it will become a top 10 global retailer within five years, perhaps even rivaling Walmart’s top spot within 10. It is not surprising Amazon continues to grow quickly, with its access to anyone with an internet connection, whereas bricks-and-mortar retailers are limited by the speed in which they can build stores. Additionally, Amazon’s presence in just 12 markets means it has the opportunity to expand into new territories, particularly emerging countries where internet access is growing rapidly.

Amazon also updated on guidance for the fourth quarter.

It expects growth of between 27% and 44% in net sales and profits to be between a $200m (£124.1m) loss to $250m (£155.2m) profit. This broad range, and more importantly the potential of delivering a loss in the fourth quarter, demonstrates Amazon’s risk taking strategy – investing heavily to enable future growth – a strategy that will pay off in the long run.