When a company reports a 45 per cent drop in profit for the quarter, what does its stock price do? If it’s Amazon, it soars. On Jan. 29, a day after the online shopping behemoth released its disappointing fourth-quarter results, its stock went up nearly 10 per cent to $284, pennies shy of the record hit earlier last month. “Have investors gone insane?” asked Henry Blodget, on the financial blog the Daily Ticker. A Forbes article called those who rushed to buy “mad hatters” and dubbed the whole situation “Amazon in Wonderland.”
So what explains it? The answer can be found partly in the company’s growing sales, up 22 per cent in the quarter, to $21 billion. Along with sales of consumer goods—from books and televisions to diapers and toys—revenue is growing from Amazon’s cloud computing system (used by tech companies like Netflix and Dropbox). Its Kindle brand, meanwhile, has helped the company increase ebooks sales by 70 per cent last year. And Amazon continues to grow its tablet line (the Kindle Fire is the latest) to compete with the likes of Apple and Samsung. There are rumours the company is eyeing the smartphone business, too.
Amazon’s chief problem is that its low prices and free shipping strategy ensure that its profit margin is miniscule. (Amazon actually lost $39 million in 2012.) But there is lots of room for growth and signs of improvement. Gross margin increased by four per cent last quarter over the same period last year. The company is also investing heavily in new shipping centres, which could further boost profitability. Victor Anthony, an Internet analyst with Topeka Capital Markets, says Amazon’s stock is actually undervalued.
Consider, by comparison, the fate of Apple. The iPhone maker also released quarterly results last month. It had record profits of $13 billion, but a shrinking gross margin, down six per cent from the same period last year. As a result, investors lost faith and its stock took a hit, dropping by about the same amount (10 per cent) that Amazon’s stock went up.