Roundtable: Amazon's Rebound Opportunity
Not too long ago, Amazon.com released its 3Q14 earnings, and to be blunt—things weren't quite going as the online retail giant had hoped. The company's profits do indeed continue to rise, but Bezos's behemoth is continuously looking for ways to expand its horizons. Hence the tragic flop of the Fire Phone, which, well, wasn't a good idea to begin with. One quarter isn't going to kill the company, however. Q4 is, beyond the shadow of a doubt, the most coveted of quarters, as it contains the wallet-draining holiday season. And consumers love themselves the convenience of their Amazon-goodness. But should consumers and investors be concerned that Amazon's foray into new territory might be a distraction as opposed to an attraction?
Let's ponder the following question(s):
Taking Amazon's track record and 3Q14 earnings into consideration, what can the company do to earn back its investors' trust and positively rebound? Is there cause for alarm?
Let's see what some of our prime respondents had to say about the subject.
Investing in Amazon is like sitting at the popular table in high school. Drones, like the star quarterback, are sexy. However, the popular table loses some swag points when it's open to just anyone. Amazon, like the popular table, needs to streamline its innovative efforts, rather than play catch up with the Googles and Apples of the world. The company is credible on its own as the largest internet-based company in the United States, and doesn't need to emulate other business models.
Despite a more than lackluster quarter, Amazon has the capacity to earn back investors' trust by continuing to show advancements in and commitment to its autonomous aerial vehicles initiative. Flirting with the mobile phone business, "because everyone else is doing it," is no longer enough to convince shareholders to stick around following a loss of more than 20 cents per share. All the fuss about being able to order a DVD on Amazon and have it delivered, via drone, before your popcorn is done, has to be supported by true advancements. 365 days of progress on a single innovation means more to an investor than releasing an iKindleFIREbookPRO, just to keep up.
~Abby McAleney (Follow Abby on LinkedIn)
While Amazon's 3Q'14 earnings disappointed investors and shares declined sharply, the company still has strong long-term prospects and several strategic levers it can pull to improve performance. These include more focused investments in international growth, decreased investments in hardware, Amazon Web Services, and one that's near and dear to my heart: Prime—Amazon's customer loyalty program that for an annual fee provides me with access to a litany of digital media offerings and quick shipping on a wide variety of goods (probably only a small subset of which I really need, but hey, with free two day shipping, why not order that The Mountain Three Wolf Moon t-shirt that everyone's been raving about). Prime members also are eligible to receive Amazon's new Echo for the discounted price of $99, if you're more into that kind of thing instead of the shirt, or you can buy both and set up your Echo to remind you to wear the shirt.
Prime is recognized as creating customer loyalty, but its benefits extend beyond that crucial function. In addition to increasing loyalty, Prime also drives customers to Amazon's aforementioned digital offerings (including its recent acquisition Twitch), thus leading them to spend more of their overall time, and often money, utilizing Amazon's services instead of a competitors'. Moreover, Prime members have been found to spend substantially more at Amazon than non members (42% more dollars per transaction and 21 more dollars per buyer according to comScore). This data is especially positive for me, since it means I'm not the only one running around buying unneeded t-shirts because of the rave reviews and included expedited shipping. Moreover, the type of increased customer loyalty and engagement that's fostered by Prime is essential as more and more big box retailers attempt to adapt to competition from Amazon (e.g. Wal Mart rolling out a new price matching strategy).
Additionally, the recent price hike for Prime, from $79 to $99 dollars a year, is forecasted by some to produce as much as much as $1.7B in additional revenue for Amazon in 2016, with much of that flowing directly to the bottom line (as there are essentially no costs tied to the increase) for a potential EPS boost of as much as $2.41. With analysts estimating as many as 50 million prime members worldwide, and rapid growth continuing, this should be a substantial tailwind for Amazon's shares. While Prime is just one of the arrows in Amazon's quiver of growth and profitability drivers I believe it is one that will help drive the company to continued strong performance. Notably, investors seem to have gotten over some of their initial disappointment with shares nearly back at their pre 3Q earnings levels.
~Josh Clarkson (Follow Josh on LinkedIn)
As an avid supporter of Amazon.com and all the constantly, pleasantly surprising services the company represents, I can't help but feel like this is nothing to worry about. In a lot of ways, Jeff Bezos runs his business as a hungry entrepreneur, constantly looking to bring the next big thing to the market. I don't think the average person knows how vast Amazon's services run on the internet–from sites/services such as Woot.com, Audible and Twitch, to Amazon Fresh and beyond. The company has also received a lot of conveniently-timed positive press for an upcoming product called Amazon Echo, which isn't entirely a new idea, but is a new presentation of said idea. Think Siri, but with learning capabilities thanks to the cloud, and for the home environment as opposed to your pocket. But if I had to paraphrase Amazon's investment outlook, I'd simply say don't worry, things will be just fine.
Truth be told, Amazon has had a tumultuous history with its net profits, but it continues to push forward, innovate and expand. Ideas may flounder and fail, but the general business model is still going strong (even if Prime memberships have seen a price increase). The best way to succeed is to try, and try, and try. Always pushing forward, sometimes failing, until you find out what sticks, and then you latch on and climb further. That's the Jeff Bezos way of doing things. And I think investors know that, even if the short term doesn't capture the big picture.
~Aaron Steinfeld (Follow Aaron on LinkedIn)
As a loyal Amazon customer, I have no concerns about the company. Amazon Prime is a transformative program and likely why I now own a $20 cowbell, among many other more "needed" purchases. But analysts and investors have a different outlook and are beginning to wonder which metrics, if any, Amazon is using to guide company strategy. (Accounting spoiler alert from the CFO: free cash flows.)
Despite being more than two decades old and the world's second-largest retailer, Amazon is still confounding to the most experienced Wall Street minds. You can find plenty of online commentators parsing every piece of the company's quarterly earnings reports. From my outsider's perspective, instead of becoming the "everything store," Amazon seems to be more focused on becoming simply "everything." Recent investments include launching a mobile card reader called Local Register, expanding Amazon Fresh grocery delivery to New York and building new fulfillment centers. The company also purchased the video game streaming startup Twitch Interactive for nearly $1 billion, took a $170 million write-down on the Fire Phone flop (with another $83 million worth of leftover inventory) and spent more than $100 million on original video content in the third quarter.
CEO Jeff Bezos asks investors to take a long-term view, that the interests of loyal customers and company shareholders will align eventually, and that these investments fit into the company's roadmap. But "In Bezos We Trust" can only go so far. With management unwilling to provide much of a timeline for investors, perhaps a first step would be greater transparency. In a virtually break-even business, how are new products and investments like the cloud computing Amazon Web Services, Amazon Prime, Kindle and Amazon Fresh performing financially? At that point, short-term losses for long-term success may be easier for Wall Street to stomach.
~Tim Ragones (Follow Tim on LinkedIn)
What do you think? Is Amazon reaching the peak of its potential, or will it continue to grow? Share your thoughts with us, and we'll respond back in kind. 