Amazon, as is its tendency, reported another record-breaking quarter. This time, it was a 36 percent revenue boost, to almost $13 billion in the quarter. Operating cash flow increased and—most critically—net income increased 8 percent, to $416 million for the quarter. For the full year, net income increased a stunning 28 percent (to $1.15 billion). It's beating just about every competitor in its segment (for the record, what retailer is not in Amazon's segment?).
So what's the problem? What made Amazon's shares plunge some 7.2 percent in New York trading? The company projected that the next quarter's profit would fall 2 percent, to 34 percent. Wall Street is complaining about a 34 percent margin prediction?
What Amazon said is behind that 2 percent drop is what really infuriated Wall Street. Was it massive bonuses? (Not that they wouldn't have been deserved.) Lavish all-hands meetings in Hawaii? Nope, it was investment in new fulfillment centers and IT infrastructure.
Consider these Wall Street analyst explanations, from stories filed by Bloomberg and The Wall Street Journal. "Is this going to be a low-margin business?" said Colin Gillis, an analyst at BGC Partners in New York , who has a "sell" rating on the stock. "Amazon has hit a level of maturity. So the question is, how long do investors have to wait? " Or this delicious comment: "It's disappointing because we were expecting that investment spending will come down now, but it clearly hasn't," said Caris and Co. Analyst Sandeep Aggarwal.
It's hard to stomach Wall Street celebrating record profits and overwhelming market share and yet criticizing the IT and related investments that enabled those profits and market share to happen. How do they think Amazon withstood a massive D-DOS attack from WikiLeaks fans, while everyone else who was attacked fell?
In E-Commerce (and the same clearly goes for Mobile and Social retail sites), the Amazon "stores" are IT investments. When Wal-Mart was swimming in profits, did Wall Street attack the company for opening more stores? With Amazon, its growth and expansion has to be done through ongoing infrastructure investments. When Aggarwal said that he was expecting that investment spending would come down by now, he can thank his investing stars it didn't. Amazon's profits for the rest of 2011 and 2012 will be the results of those investments.
I'm reminded of a conversation I had with a veteran Wall Street analyst several years ago, where we were discussing a move by Apple. Asked whether he thought that a particular rumor was true, he said "Absolutely not." But he then added that he would recommend to his clients that they act as though it was true.
Why? The analyst answered: "I learned a long time ago that my job is not necessarily to be right. It's to accurately guess what most of my oh-so-young colleagues will do. I think they'll believe this, and I have to make my decisions based on that. Actual reality doesn't have much of a role here any more."
True enough. Here's hoping that retail boards don't take the wrong lesson from Amazon.