E-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) recently reported its first quarter earnings, singing its same old song of light profits on monstrous revenue growth.
First quarter
For its first quarter, Amazon.com, Inc. (NASDAQ:AMZN) earned $0.18 per share, or $82 million, down 36% from the $0.28 per share it reported in the prior year quarter. Analysts polled by Thomson Reuters had expected Amazon.com, Inc. (NASDAQ:AMZN) to earn $0.08 per share. EBITDA, which is a better gauge of Amazon.com, Inc. (NASDAQ:AMZN)’s growth, rose 37.2% year-on-year to $1.11 billion.
Meanwhile, revenue rose 22% to $16.07 billion, but fell short of the $16.1 billion that analysts had expected. That miss caused shares to plunge nearly 8% after earnings on April 26.
Looking forward, Amazon expects second quarter revenue to come in between $14.5 billion and $16.2 billion, in line with the consensus estimate of $15.9 billion.
Core businesses
Despite its own tight margins and profits, Amazon has consistently stolen market share away from brick-and-mortar retailers such as Best Buy Co., Inc. (NYSE:BBY), Barnes & Noble, Inc. (NYSE:BKS) and Wal-Mart Stores, Inc. (NYSE:WMT). In addition to being the largest digital bookstore and e-commerce site in the world, Amazon’s streaming video business is also growing rapidly, thanks to its subscription-based Amazon Prime service.
Amazon Prime offers free shipping on physical product orders, access to the Kindle owners’ book lending library, and unlimited access to select television shows and movies. The growth of Amazon Prime has been boosted by the rising popularity of its loss-leading Kindle Fire tablet, which is currently the second most popular tablet in America after Apple Inc. (NASDAQ:AAPL)’s iPad. The iPad currently controls 43.6% of the U.S. tablet market while the Kindle Fire has claimed nearly 8%.
Sales growth
Despite its efforts to expand overseas into high growth markets such as Brazil and China, 58% of the company’s revenue still comes from North America, a 26.4% increase from the previous year. Amazon’s North American Media business segment also grew year-on-year from 14.4% to 16.0% of total revenue. That growth was attributed to growth in the digital consumption of e-books, apps, games and videos. Across all markets, Amazon’s added 21 million active accounts during the quarter to end with 209 million users worldwide.
Amazon’s international media business, which accounts for 16% of the top line, posted a weak 1.3% increase in sales from the previous year, its weakest growth in five consecutive quarters. That anemic growth has prompted some analysts to suggest that Amazon needs to ramp up its overseas efforts. Amazon currently has Kindle stores in Brazil, China, Japan and Canada, where it sells thousands of local language e-books.
Meanwhile, electronics and general merchandise, which account for 38% of Amazon’s top line, declined 28.4% from the prior year quarter. The segment tends to experience cyclical seasonal surges, with the holiday season traditionally being its strongest quarter. Amazon is also building additional fulfillment centers to expand its reach across the United States, to reduce shipping times and expenses.
Positive catalysts
There are several major growth catalysts on the horizon for Amazon. Its recent acquisition of niche social reading site Goodreads is expected to boost book sales with more focused reviews. In addition, Goodreads should provide Amazon with additional information regarding customers’ reading habits, which can be used to streamline its e-book offerings. Amazon is also developing a direct publishing business (Kindle Direct Publishing), which can help it bypass major publishers such as Simon & Schuster, which have denied Amazon the right to set its own prices for digital versions of its titles.
Amazon is also expanding heavily into the digital streaming business in an effort to rival Netflix, Inc. (NASDAQ:NFLX). Amazon Prime Instant Video is not only available on the Kindle, but also Microsoft Corporation (NASDAQ:MSFT)’s XBOX 360, Sony Corporation (ADR) (NYSE:SNE)’s Playstation 3, personal computers, tablets and smart televisions. Amazon expanded its digital video library to 38,000 movies and television shows during the previous quarter. Netflix, Inc. (NASDAQ:NFLX), which has over 100,000 streaming titles, still has the upper hand in its library size, but Amazon’s relatively new video streaming service has already achieved consecutive double-digit growth over the past five quarters.
In addition, Amazon has launched its own television studio, Amazon Studios, which has already produced 14 pilot shows, which include Zombieland, Betas and the Onion News Empire. Amazon Studios is a direct response to Netflix, Inc. (NASDAQ:NFLX)’s own studio, which has created well-received series such as House of Cards and Hemlock Grove.
An upcoming set-top box
As if Amazon Prime and Amazon Studios weren’t enough for Netflix, Inc. (NASDAQ:NFLX) to contend with, Amazon recently announced that it was planning to release a set-top streaming box later this year. Although Amazon’s streaming video is already available across a plethora of platforms, a branded set-top box would lock users into Amazon’s ecosystem, and generate more revenue.
Lab126, Amazon’s business division that created the Kindle, is reportedly working on the set-top box. If Amazon follows the loss-leading business model of the Kindle, then it is likely to offer its set-top box either at a loss or thin margins, in the anticipation of making up the lost revenue later with digital sales. Amazon’s cheap set-top box could seriously upset the balance of the streaming video content market, on both the hardware and software fronts.
First, smaller competitors such as Roku and NetGear, Inc. (NASDAQ:NTGR) would immediately get taken out, since they wouldn’t be able to sell their products at a cheaper price than Amazon. Apple Inc. (NASDAQ:AAPL)’s current set-top box, the iTunes-connected Apple TV, retails for $99 and could also be swept away if Amazon comes in at a comparable or lower price.
Meanwhile, Apple Inc. (NASDAQ:AAPL)’s rumored plans for an iTV would be altered drastically, since an iTV is aimed at drawing customers into Apple Inc. (NASDAQ:AAPL)’s iTunes ecosystem. The last thing Apple Inc. (NASDAQ:AAPL) wants is for users to hook up an Amazon set-top box to its large screen televisions for a comparable smart TV experience. If Apple goes ahead and produces a full-sized smart television, as many analysts speculate it may, then it shoulders a lot more risks than the simple set-top box that Amazon is offering.
Considering that big screen, “non-smart” televisions are getting cheaper, it would also make sense for users to simply hook up Amazon’s device to create a cheap smart television, rather than purchase a pricier model with internal “smart” features. As I noted in a previous post, the average cost of a 50-55 inch non-Internet television is $520, while analysts speculate that Apple’s iTV could cost $1,500 to $2,000. Therefore, Amazon’s new tactic would not only threaten Apple, but also smart TV makers Samsung, Sony Corporation (ADR) (NYSE:SNE) and Panasonic.
Lastly, although Amazon offers a Netflix, Inc. (NASDAQ:NFLX) app for the Kindle, it’s unlikely that it will offer one on its set-top box, which means Netflix will either have to rely on its other hardware partners to support it, or to create a branded set-top box of its own.
The Foolish Bottom Line
I’ve always believed that Amazon has the ultimate goal of being all things to all people. CEO Jeff Bezos is a visionary on par with Steve Jobs and Bill Gates, and I think that Amazon’s long-term strategies will pay off. The company has a history of creating and disrupting markets — first with online shopping, then with e-books and tablets, and now with streaming video. It’ll be interesting to see where Amazon’s new investments in television show production, set-top boxes and international expansion take it over the next decade and beyond.
The article Should These Tech Giants Fear Amazon? originally appeared on Fool.com and is written by Leo Sun.
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