Amazon.com riles investors with spending, price cuts
SEATTLE – For years, Amazon.com Inc. has insisted that its hefty investments, whether in cheap shipping deals, mysterious technology or new retail offerings, will please its customers and, ultimately, pay off for its long-term shareholders.
But nine years after the company went public, some investors are getting antsy. Amazon.com shares plunged more than 20 percent Wednesday after the company reported a sharp drop in quarterly profits and laid out fresh spending plans and deeper price cuts. The company also reduced its operating income forecast for the year.
“I think a lot of the frustration today is because this company perpetually seems to be in a heavy investment mode,” said Philip Remek, an analyst with Guzman & Co.
Amazon.com shares fell $7.33, or 21.8 percent, to close at $26.26 Wednesday on the Nasdaq Stock Market, wiping out over $3 billion in market capitalization. The stock has not traded near that level since April 2003.
The sell-off comes as some are questioning what the future holds for Amazon.com. A decade ago, the Seattle-based company was a pioneer in the relatively new field of Internet retailing. Now, it faces fierce competition from both Web-based retailers and traditional companies that are finding cheaper and more sophisticated ways to sell things online.
The rush of companies online has made it harder for Amazon.com to maintain customer loyalty or offer the best deal, as people grow accustomed to browsing the Internet for the lowest price.
Amazon.com has responded with costly programs designed to keep customers coming back and has defended them with typical vigor.
Speaking to analysts Tuesday, founder Jeff Bezos steadfastly argued that Amazon Prime, which offers customers unlimited two-day shipping for $79 a year, will pay off in the long run. Analysts weren’t so sure.
“It is of a limited benefit financially,” Remek said.
Analysts also were caught off guard when the company said it planned to slash prices for many of its products.
“I don’t know how judicious it’s been and whether it will pay off in the kind of profitability that people are hoping for,” Edward Weller with ThinkEquity Partners said.
Some are also beginning to question the company’s goal of offering a broad array of products, particularly when it means moving into areas such as the low-margin grocery business.
“What is the competitive advantage that Amazon brings to delivering all the types of Jell-O that you could possibly want?” said David Garrity, an analyst with Dinosaur Research.
Another frustration to some analysts is that Amazon.com has been extremely tightlipped about what it is doing with some of its money, such as the substantial resources it has poured into technology initiatives over the years.
Analyst Dan Geiman with McAdams Wright Ragen said that makes it difficult to predict when, how or if Amazon.com’s spending will pay off.
“It’s gotten to the point where you just don’t know what those returns are going to be,” he said. “It’s just hard to measure.”
Of course, other technology companies have been accused of being secretive or arrogant when it comes to investment plans. But Remek said companies such as Google Inc. and online retailer eBay Inc. also have showed a willingness to change direction when their plans didn’t seem to be paying off.
Amazon.com also isn’t the only company with big spending plans for long-term growth – Google and software giant Microsoft Corp. also recently made similar moves, for example.