Sometimes I wonder just how much hair has been lost trying to predict exactly how Amazon.com  stock will react following quarterly earnings reports.

Last quarter, for instance, Amazon stock hit an all-time high in the days after the company not only missed analyst estimates for both revenue and earnings per share, but also lowered its guidance.

This time around, after what seemed like perfectly decent results, shares of Amazon dropped like a sedated 800-pound e-commerce gorilla before finally closing down more than 7%.

 

Image source: Wikimedia Commons.

So were the results really that bad? Let’s dive into the numbers to find out. 

For the first quarter, net sales rose a whopping 22% to $16.07 billion, falling just short of analysts’ expectations of $16.15 billion. However, note that Amazon’s reported revenue also included an unfavorable $302 million impact from year-over-year changes in foreign exchange rates and so otherwise would have exceeded estimates.

Operating income decreased 6% to $181 million, including a $12 million hit from foreign exchange rates, and net income fell 37% to $82 million in the first quarter, or $0.18 per diluted share. Curiously enough, that number nearly doubled analysts’ estimates, which called for net earnings of $0.10 per share. 

So why did Amazon stock get punished? Look no further than management’s second-quarter 2013 revenue guidance of between $14.5 billion and $16.2 billion, which amounts to year-over-year growth somewhere in the range of 13% to 26%. In the end, even if management is conservative, the middle of their range sparked short-term fears of decelerating growth given analysts’ average revenue estimates of $15.9 billion next quarter.

The multibillion-dollar question
Even so, it’s becoming increasingly evident that one question remains on investors’ minds: When will Amazon start making the big bucks?

After all, while its gross margin did rise to an all-time high of 26.6% last quarter, both its operating and net margin remained razor thin at 1.1% and 0.5%, respectively. As fellow fool Evan Niu pointed out recently, Amazon’s historical bottom line looks downright silly next to other ridiculously profitable tech companies like Apple , which just last week told investors it earned $9.5 billion (with a “b”) on sales of $43.6 billion.

If Amazon were as profitable as Cupertino, then, simple arithmetic tells us it would have earned around $3.5 billion on last quarter’s revenue instead of that measly $82 million.

To Amazon’s credit, it still generates plenty of cash from operations, which itself increased 39% to $4.25 billion for the past 12 months. In addition, had Amazon not spent $1.4 billion on property and corporate office space in Seattle last quarter, free cash flow would have come in at around $1.58 billion.

So why do investors put up with it?

The wonders of properly managed expectations
In the end, this is exactly how Amazon CEO Jeff Bezos told shareholders he would run the company when it went public in 1997. In fact, in Bezos’ first letter to Amazon shareholders, he wrote the following

Source: FULL ARTICLE at DailyFinance