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Amazon losses widen as it braces for rocky holiday quarter

The e-commerce company misses Wall Street expectations and reports a third-quarter loss of $437 million. More critically, it warns that its fourth-quarter revenue will also disappoint.

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Amazon CEO Jeff Bezos. James Martin/CNET

Amazon had a rough third quarter, and it looks like its holidays won't be very merry either.

The company on Thursday posted a third-quarter loss of $437 million, or 95 cents a share, and revenue of $20.58 billion, falling short of analysts' average forecast of a loss of 74 cents a share with $20.84 billion in revenue.

More importantly, the company said it expects sales between $27.3 billion and $30.3 billion for the critical fourth quarter, which also misses Wall Street's forecast of $30.89 billion. It also provided a wide range for its operating income -- between a loss of $570 million and a profit of $430 million. Analysts were hoping Amazon would turn a profit.

That Amazon would offer such a wide range during its most critical holiday sales period speaks to the uncertainty facing the business. Like any other retailer, Amazon sees a spike in activity during the season, with big shopping days like Black Friday and, in more recent years, Cyber Monday, driving orders.

The third-quarter losses, meanwhile, are a result of Amazon's willingness to invest in new types of products and services -- making risky bets that don't necessarily pay off right away. Generally, investors know they will need to wait several quarters before they see results from these investments. The most recent cycle of investment has resulted in losses for two years, and while some on Wall Street are a bit jittery, many are still banking on the vision of CEO Jeff Bezos.

In after-hours trading Thursday, Amazon's stock fell 11 percent to $278.88, after closing at $315.64 earlier in the day.

Amazon continues to add customers. Amazon's Chief Financial Officer Tom Szkutak said active customer accounts reached 260 million, up from 250 million last quarter. He said Prime accounts were continuing to grow, thanks to Prime Instant Video, but didn't disclose a figure. Analysts estimate that Amazon has roughly 25 million Prime accounts. Szkutak said customers are signing up for the Prime trial to watch videos and then keeping their subscriptions when the trial is over.

"The other thing we're seeing is they are buying physical product, which is a great impact for us.," he said during the earnings call. "We're still certainly in investment mode there, but we like what we see."

Amazon continued to spend in the third quarter. It bought live-streaming site Twitch for nearly $1 billion. The site streams live video game play and gives the e-commerce company access to 55 million serious gamers. Amazon's bet on content is no surprise. The company said last quarter it planned to spend $100 million on original video content during the third quarter, and it announced a new lineup of original video games earlier this month. Amazon also unveiled a refresh of its Kindle e-reader and Fire tablet lines.

The third quarter also marked the first full quarter of sales for Amazon's debut smartphone, the Fire Phone. While it's unlikely Amazon will share any numbers, there is some indication sales are low. AT&T, the exclusive carrier for the device, reduced the price of the phone to 99 cents just two months after it went on sale. Szkutak said the company took a $170 million charge related to the phone's write-down of costs.

The Fire Phone rounds out Amazon's quickly growing line of hardware devices, which is anchored by its popular line of Kindle e-readers and includes a line of tablets, a media-streaming device and a game controller. The hardware is meant to bolster Amazon's e-commerce business by selling affordable devices that facilitate the purchase of goods and services from Amazon's site.

As Amazon continues to grow and attract shoppers with fast shipping and low prices, brick-and-mortar retailers have been fighting back. The major retailers now offer limited free shipping, based on the amount customers spend, year-round, and in-store pickup to combat Amazon's speedy delivery. On Wednesday, Target went as far as to offer unlimited free shipping sitewide for the holiday season.

The results came in at the upper range of its internal expectations. Last quarter, Amazon said it expected a third-quarter operating loss between $810 million and $410 million, and sales to grow between 15 percent and 26 percent to $19.7 billion to $21.5 billion.

But the results also proved to be a setback from a year ago, with the company's loss widening significantly from the $41 million hit it took a year ago. Revenue, however, rose more than 20 percent from a year ago.

Amazon has something to prove this next quarter. While the company boasted a record season in 2013, with more than 36.8 million items ordered worldwide during Cyber Monday, it also ran into shipping problems. Logistics provider UPS had a backlog of Amazon packages, which meant some shoppers couldn't get their packages until after Christmas. It was a black eye for Amazon and reports have since surfaced indicating that the e-commerce giant isn't about to let it happen again. The Wall Street Journal reported in April that Amazon was building out its own logistics network to handle what's known as "the last mile" of delivery, which would allow Amazon more control over the entire shipping process.

Correction, 1:33 p.m. PT: The original article incorrectly stated Amazon's stock price in after-hours trading.

Update, 3:24 p.m. PT: Added details from the earnings call.