Why Wall Street hasn't lost faith in Amazon

Amazon had a troubling loss last quarter and it predicts rougher waters ahead. So why aren't investors more concerned? Because CEO Jeff Bezos is at the helm.

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Amazon CEO Jeff Bezos at the Fire Phone launch. James Martin/CNET

At Amazon, there's no question Jeff Bezos is the man.

After founding the company in 1994, he's spent tens of billions to make it the world's largest e-commerce player. He's now spending even more to transform it into a hub for goods and content services that customers can access, if they want, through Amazon-branded devices like the recently released Fire TV streaming media box and Fire Phone smartphone.

The result is good for consumers who want fast shipping, low prices, and, increasingly, unlimited access to quality programming.

But all this ambition comes at a price. Amazon last week reported earnings that fell far short of analysts' expectations because of the big dollars needed for Bezos to realize his goals. The stock tanked -- falling 10 percent the day after earnings and remaining down Monday and Tuesday -- reflecting shareholders' worries that Bezos is spending too much.

But analysts say it's OK because investors believe in the man.

"He instills such confidence because he built (Amazon) from nothing," Macquarie analyst Ben Schachter said, crediting Bezos for Amazon's voluminous sales figures, which totaled $19.34 billion last quarter. "Investors are definitely more frustrated than ever, but most are still staying and waiting."

Investors have long trusted Bezos's business strategy, which involves losses so the company can expand into new markets and make more money off consumers through its devices and Prime subscription service. Amazon has consistently increased its sales -- and its spending -- in the last two years.

Amazon's sales rose 23 percent last quarter, thanks to a push into cloud computing and revenue from third parties who sell their wares through Amazon's marketplace. Moving into new categories in a big way is a common tactic for Bezos. Amazon Web Services is a more recent example of this, but Bezos did the same thing when he first started selling products other than books, and when he introduced the first gadget in Amazon's now-growing hardware line: the Kindle e-reader. Though he's not making money in the short term -- Amazon reported a second quarter loss of $126 million last week -- those who take a long term view see the potential for large gains.

"If there's a huge opportunity, he's going to go all out," said CRT Capital Group analyst Neil Doshi. "It might put pressure on margins, it might cause the stock to tank. But at the end of the day, that's something Amazon can own, so I think he's very aggressive about that."

Bezos is crucial to the company's success. The largest stockholder at Amazon, Bezos owns 18 percent of the Seattle-based company. He's CEO and chairman of the board. When asked what would happen if Bezos were ever to leave Amazon, several analysts said it was nearly unfathomable, given Bezos' drive.

"He will never leave," Needham analyst Kerry Rice said.

"If he left, (the) stock would get killed," Schachter added.

To further tie consumers into Amazon's ecosystem, Bezos has invested in the Prime $99 subscription service, which has a membership that spends at least twice as much as non-Prime customers. In addition to direct investments such as the addition of Prime streaming music in the last quarter, Amazon also launched the Kindle Fire TV, to compliment its video-streaming service, and the Fire Phone to encourage people to use its apps and purchase even more from Amazon.com through Prime.

Amazon is also investing in original content and said it would spend $100 million to produce shows during the third quarter of this year. So far, none of the Amazon produced shows have taken off in the same way Netflix' original programing has.

The price tag for all these services has grown at roughly the same rate as sales over the two years. Amazon spent $19.35 billion on operating expenses in the second quarter, ended June 30 (second-quarter sales came in at $19.34 billion). Spending is up 24 percent, or $15.6 billion, from last year.

Amazon' rivals don't spend nearly as much. Apple reported $4.5 billion in operating expenses last quarter on sales of $37.4 billion. Google, known for embarking on ambitious tech projects like self-driving cars and mechanical animals, spent $11.7 billion and had $15.96 billion in sales.

While Wall Street is used to Bezos' big spending, Amazon's recent loss, coupled with its prediction that it may lose even more this quarter, is behind the recent sell off in its shares. It closed down 41 cents, or less than 1 percent, to $320 on Tuesday.

To be sure, this isn't the first time Amazon shares have dropped after an earnings report.

"We continue working hard on making the Amazon customer experience better and better" was what Bezos had to say in a statement accompanying last week's earning report.

Doshi said investors may finally be realizing Amazon just can't increase its sales at the rate it used to, given its size. And it's hard for Wall Street to watch Bezos gamble on projects like original content. If he would let off the gas just a bit for investors to breathe a bit, they might be more ready to accept whatever idea he has next. And he's sure to have another, Doshi said.

The $99-a-year Prime service, which now boasts an estimated 25 million members, is a perfect example of Bezos' bets. "In the beginning people thought, 'This is crazy; sure, your margins are high, but it's costing you way too much to ship this stuff in two days,'" Doshi said, noting the stock was punished for a couple of years "until people realized this whole Prime thing -- it went from strange and not so good an idea to one of the most brilliant business plans."

 

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