Let's get two things quickly out of the way. Amazon.com's (AMZN) quarter, for lack of a better word, stunk. Guidance for the first quarter stunk even more.
The real deal today is that the market is voting that despite Amazon's phenomenal breadth of products offered and an ever-looming presence over the likes of retailers with physical stakes in the ground, there are fundamental issues in the mix worthy of a lower stock price. On top of this lays the basic reality check question: are you the investor able to separate yourself from the stellar Amazon shopping experience and a low-single-digit percentage operating margin business near term, cloaked in an expensive valuation and avoid buying the dip? I hope you are able to do so, given the hidden, and not so hidden, messages inside Amazon's fourth quarter earnings.
The Hidden Messages
- Headcount ballooned 67% in the quarter. Amazon views these people and the legions likely to follow as integral to its global expansion push, so if operating margins continue to be soft it's unlikely we will see a cost-cutting program. These are now medium-term structural costs that will eat up the little gross profit dollars that Amazon generates (it loves to move volume through competitive pricing).
- Fixed assets grew 85% in the quarter, creating additional structural costs and mostly stemming from the opening of new fulfillment centers (management declined to release a figure on 2012 fulfillment openings, but it sure sounded as if a number greater than the 17 opened in 2011 is possible.)
- Consolidated operating margin has trended lower since 4Q 2010 and in 4Q 2011 both North America and international reversed operating income gains from the holidays of 2010. Is Amazon trying too hard to be everything to everyone?
- Not all areas of the company's businesses (videogames) in terms of product and geography (Europe) are firing on all cylinders. The valuation on Amazon suggests everything at Amazon has to be successful for the next five years and beyond.
Six More Obvious Things from Amazon's Quarter
- Earnings beat was irrelevant because earnings expectations were marked down. In hardcore jargon, it's a low-quality beat.
- Not only in a best-case scenario has Amazon anticipated an operating income shortfall in the first quarter relative to the prior consensus on the high end of its range, but the range itself is absurdly wide. The Street is against wide forecast ranges.
- All of the spending to support growth was front and center, perhaps too front and center.
- Operating income down in both North America and international.
- What I would characterize as lower-margin businesses in electronics and general merchandise continue to increase greatly as a percentage of total sales.
- I doubt many people realized Amazon's inventory increased quicker than its sales growth in in the fourth quarter, but it did.