Amazon’s (NASDAQ:AMZN) net income for Q3 2011 dropped 73% to $63 million compared to Q3 2010, despite its net sales increasing 44% during same period last year. [1] The decline in profits was due to the company’s aggressive expansion in building new fulfillment centers and investments in the Kindle e-reader and its digital content business. While this move will aid the online retailer’s bottom line in the future and make it more competitive against eBay (NASDAQ:EBAY) in online retailing and against Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX) in tablet and online streaming space, respectively, its near term profit margin may take a hit.
Amazon, however, is expecting strong Kindle Fire sales to drive its online electronics and general merchandize (EGM) business in the next quarter. This coupled with international expansion efforts should boost Amazon’s international online EGM market share for the foreseeable future.
Our complete analysis for Amazon’s stock is here.
Kindle Sees Good Traction
Kindle Fire which was launched last month for $199 has received good response. Jeff Bezos, founder and CEO of Amazon.com, said, “In the three weeks since launch, orders for electronic ink Kindles are double the previous launch. And based on what we’re seeing with Kindle Fire pre-orders, we’re increasing capacity and building millions more than we’d already planned.”
The tablet could add major upside to Amazon’s electronics and merchandise business with expected sales of 5 million in Q4 2011, according to JP Morgan research. [2] Compare this with Apple’s iPad 2 that saw 4.7 million unit sales during the quarter it was launched.
Kindle, however, still has a long way to go before it makes a meaningful impact on Amazon’s overall revenues. For now, it constitutes only around 1% of Amazon’s stock value, by our analysis. Nevertheless, with competitive pricing strategies and strong volumes it can boost Amazon’s top-line growth.
Amazon’s International Growth Continues
Amazon registered international segment sales of $4.94 billion, up 44% y-o-y. Its EGM revenues internationally grew higher at 63% compared to 56% for North America. Also EGM now accounts for 54% of Amazon’s total international revenues, up from 48%. [3]
Amazon has presence in several countries including the U.K., Germany, France, Italy, Japan, and Canada, among others. It is expanding aggressively in China which has around 9 distribution centers currently. [4] Amazon announced that it’ll be adding another 17 fulfillment centers to the 52 it has as of last year, in order to support growth. [5]
While we estimate Amazon’s share of international online electronics & general merchandize (EGM) sales will increase from close to 4% in 2012 to 8.6% by the end of our forecast period, Trefis members expect an increase from 4.4% in 2012 to around 10% during the same period. The member estimates imply an upside of 5% to the Trefis price estimate for Amazon’s stock.
We currently have a Trefis price estimate of $240 for Amazon’s stock, about 3% above the current market price.
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Notes:- Amazon.com Q3 2011 Earnings Press Release, Oct 25, 2011 [↩]
- Amazon could sell 5M Kindle Fires during holiday shopping season, VentureBeat, Oct 24, 2011 [↩]
- Amazon.com Q3 2011 Results – Earnings Call Transcript, SeekingAlpha, Oct 25, 2011 [↩]
- Amazon expands its distribution network overseas and in the U.S., Internetretailer, Feb 2, 2011 [↩]
- Amazon Stock, Falls On Q3 Earnings Report, HuffingtonPost, Oct 25, 2011 [↩]
