Valuation, Timing & Margins Catch Up To Amazon.com (AMZN)

Amazon Inc. (AMZN) has turned in earnings for its third quarter, and we will be paying extra attention to its fourth quarter. Revenue also fell short of expectations, while guidance proved to disappoint. The seller of everything online reported earnings of $0.14 EPS on sales of $10.88 billion, which compares to the Thomson Reuters targets of $0.24 EPS and $10.93 billion in sales
Amazon also guided the fourth quarter to come in at %16.45 to $18.65 billion in sales and it put the range for operating earnings at -$200 million to a profit of $250 million. The online retailer said third quarter earnings were $63 million or 14 cents a share, down 73 percent from $231 million or 51 cents a share in the same period a year earlier. Analysts had expected a more tepid decline, calling for earnings of 25 cents a share. As noted in the preview, the fourth quarter is Amazon’s “money quarter” as it includes Christmas and the holiday season sales.

North American sales are currently about 20% larger than its international sales. Even before the guidance, Amazon traded at more than 100-times expected 2011 earnings. Revenue totaled $10.88 billion in the third quarter, up 44 percent compared to the $7.56 billion garnered a year ago. However, analysts were expecting stronger growth to $10.95 billion.

The revenue gains did little to help Amazon’s bottom line as operating income was pressured in the period by contracting margins. Shares closed down 4.4% at $227.15 versus a recent all-time high of $246.71, but shares are down sharply and just under $194.00 as of about 4:17 PM EST. Operating margin as a percentage of worldwide sales fell to 0.7 percent in the period, down from 3.5 percent in the third quarter a year ago.

Amazon had expressed its margins would be pressured by infrastructure investments in addition to its low margin sales on discounted Kindles, which have been well received by consumers. We will hold off before tallying up all of the post-conference call judgment. Bezos has had similar quarters before where the reception went from bad to good. We do not believe that can happen forever and we believe that at some point investors will start to demand better margins and higher profits.