Lately profits have fallen, dragged down by spending on new technology projects and on free-shipping offers that Amazon considers marketing in place of TV ads. Analysts expect full-year net income this year to come in at about $180 million, or half of last year's total. Most worrisome to investors is Amazon's three-year-plus binge on new technologies. So far this year its spending on technology and content, including hiring hundreds of engineers and programmers to produce all these new services and buy more servers to run them, is up 52%, to $485 million. As a result, operating margins, at 4.1% for the past four quarters, now come in at less than Wal-Mart's 5.9%. Even Barnes & Noble Inc. (BKS ), that doughty bricks-and-mortar book chain that many expected to get remaindered by the Web, has higher margins, at 5.4%. "I have yet to see how these investments are producing any profit," gripes Piper Jaffray & Co. analyst Safa Rashtchy. "They're probably more of a distraction than anything else."
All that has investors restless and many analysts throwing up their hands wondering if Bezos is merely flailing around for an alternative to his retail operation. Eleven of 27 analysts who follow the company have underperform or sell ratings on the stock--a stunning vote of no confidence. That number of sell recommendations is matched among large companies only by Qwest Communications International Inc. (Q ), according to investment consultant StarMine Corp. It's more than even the eight sell opinions on struggling Ford Motor Co. (F )
Neither analysts nor investors think Amazon's business is in danger of collapse. It's just that they're slowly losing confidence in Bezos' promises. The company's 2007 price-to-earnings ratio of 54 is much higher than its peers', even than high-flying Google Inc. (GOOG ) at 35. But Amazon's stock is down 20% since the start of the year. A 12% one-day jump on Oct. 24 reflected slightly better-than-expected third-quarter results, but also investor relief that Bezos plans to slow the growth of new tech spending.
What's more, at the same time Bezos is thinking big thoughts, Amazon's retail business faces new threats. Its 25% sales growth tracks a little above the pace of overall e-commerce expansion and nearly double its own pace way back in 2001. But other sites are fast becoming preferred first stops on the Web. Google, for one, has replaced retail sites such as Amazon as the place where many people start their shopping. And more personalized and social upstarts such as News Corp.'s (NWS ) MySpace and YouTube, which Google is buying, have become the prime places for many people to gather online--and eventually shop. It's a trend Amazon could have trouble catching up to. Says consultant Andreas Weigend, Amazon's chief scientist until 2004: "The world has shifted from e-business to me-business."
With all those problems, some might view Bezos' latest tech toys as an attempt to take their eye off the ball...
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