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Amazon’s Disappointing Third Quarter Earnings Report Pummels Stock

Shares of, Inc. (AMZN) are trading at 52-week lows today after the e-commerce giant disappointed investors with a third-quarter net loss of $437 million, or $.95 per share, well below analyst estimates of a $.76 per share loss,  and the company’s worst quarterly performance in at least a decade.

The culprit, according to the company, was the failed launch of the Amazon Fire phone in June. Without the $170 million loss resulting primarily from the ice cold Fire Phone business, the company would have easily met earnings expectations.

Revenue in the quarter that ended September 30 rose 20 percent to $20.6 billion, slightly below expectations. Almost $14 billion in sales, or 68 percent of the total (up from 65 percent in the third quarter of 2013), came from sales of electronics and other merchandise, while 25 percent, or $5.2 billion, was from sales of media, including Kindle e-books and streaming content. Media sales in the third quarter of 2013 were 29 percent of total sales. The remaining $1.4 billion (7 percent) of revenue came from the company’s cloud-based Web Services segment.

Positive developments in the quarter included the launch of the new, ultrathin Kindle Voyage and a new $79 Kindle with advanced features and a new Fire HD tablet. However, lousy reviews and poor sales of the Amazon phone doomed the launch from the start, it seemed. The marketplace rejected the pricing  which, rather than being discounted as per Amazon’s typical strategy, was on par with products from Apple and Samsung.  Amazon said it still has $83 million of phone inventory on hand, despite the fact that in September the company cut the price from the original level of $199 to ninety-nine cents.

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The company said that in addition to its already low prices, for the all-important holiday season it will offer more than 15,000 Lightning Deals with early access to select deals for Prime members, including those in the myHabit apparel business, hundreds of millions of products across dozens of categories, curated gift lists like Holiday Toy List and Electronics Holiday Gift Guide, and new features like #AmazonWishList. Customers ordering gifts on AmazonSmile  will also have a percentage of their purchase price donated to a favorite charity.

However, the company faces headwinds heading into the end-of-year shopping period, and reduced its sales and profit forecasts for the fourth quarter and fiscal year to levels that were below analyst expectations. The strong dollar and a new online sales tax in Japan are pressuring future earnings, as is the company’s 36 percent increase in workforce to 150,000. The company is now on track to lose an estimated $40.5 million for the year on estimated sales of $90 billion. Although the company doesn’t break out individual categories, some industry experts put the value of apparel sold through Amazon’s at $8 billion per year. 

From the very early days of the company, founder and CEO Jeff Bezos has eschewed profits for “getting big fast,” preferring to reinvest in long-term growth that will make up for razor-thin margins.

However, Wall Street might finally be getting impatient, particularly now that it has an alternative investment vehicle in Alibaba, which overtook Amazon as the world’s largest e-commerce company in terms of market capitalization, and which is profitable. Alibaba’s sales and EPS for the quarter ended September 14th are expected to be $2.55 billion and $.49, respectively.