Business Insider Research Morning Call 10/26/2011

Actually, Amazon Just Had A Great Quarter
“When forced to choose between optimising the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”—Amazon CEO Jeff Bezos, 1997 letter to shareholders

“[B]ased on what we’re seeing with Kindle Fire pre-orders, we’re increasing capacity and building millions more than we’d already planned.”—Amazon CEO Jeff Bezos, Q32011 earnings release

Amazon delivered earnings yesterday which disappointed Wall Street, and sent the stock tanking. 

Revenue was a slight miss and earnings were a big miss. Startlingly, the company guided to a possible loss next quarter. 

But we actually like what we saw. The revenue miss was small. But, importantly, the earnings miss came mostly from increased investment in two areas: fulfillment and distribution centres, data centres for its cloud business, which Amazon has been building out, and Kindle devices, notably the Kindle Fire. This is good news. 

Amazon is seeing huge demand, and responding to it. Big demand for its commerce business, which is about 0.5% of global retail, for its cloud business, which is rip-roaring, and huge demand for its Kindle, which is the future of its media business, which is about 45% of revenue.  

When a CEO says that he’s losing money because he’s “investing” for “the long term”, scepticism is understandably warranted. But we can’t think of anyone who has more credibility in saying that than Jeff Bezos, because he has already done it, and delivered.

Yesterday’s earnings all but prove our thesis on the Kindle Fire: that Amazon loses money on each unit, and that the tablet should be a blockbuster. Cue the joke about losing money on every unit but making it up with volume. Except that for the Kindle, it’s probably true. Each Kindle Fire sale should be seen as Amazon buying an annuity. Each Kindle device is a catalogue of content, ads and commerce that Amazon will then harvest.  

And meanwhile, Amazon’s core business is as strong as ever. Amazon is investing in amazing opportunities in big markets. It’s going to make its P&L look ugly for a while, but these are amazing opportunities where Amazon is delivering. As Jeff Bezos said in his original shareholder letter, Amazon is maximizing the present value of future cashflows. So we view yesterday’s earnings as good news from Amazon.

PREVIOUS AMAZON COVERAGE:

  • Why The Kindle Fire Will Be A Blockbuster →
  • Why Amazon Is Losing Money On Each Kindle Fire →
  • A Primer On Kindle Economics →
  • Amazon’s Disruptive Entry In The Publishing Market →
  • Meet Amazon Silk, Its New Revolutionary Browser (Which Should Help Its Bottomline) →

Nokia just unveiled its first Windows-based smartphones. They look impressive, and worthy competitors to anyone out there.

PayPal co-founder and Facebook investor Peter Thiel launches Breakout Labs, a non-profit to fund ambitious early-stage research. Thiel believes the financing of scientific research is too bureaucratic and lacks ambition, and wants to fix that. In time, startups should emerge out of that research. It’s important to pay attention to what Thiel does because he’s one of the best minds in Silicon Valley.

Call it Apple’s magic touch: publisher Conde Nast says sales of subscriptions to its titles available via the Apple Newsstand have gone up dramatically in the two weeks since the app was released.

Chatter around a blockbuster Apple TV device is resuming. We’ll see.

Eleven per cent of American adults own a tablet computer, and Pew says reading the news online is one of the most popular activities on the devices. Reading news is even more popular than email or social networking on tablets, according to the survey. Perhaps a bright spot for the struggling news industry– except that lots of people surveyed said they didn’t want to pay for the news they read.

The iPad has 97% of all ads on tablet devices. Millennial Media says impressions were up 450% on iPads compared to last year at this time– further evidence that Apple is dominating the tablet market.

China Mobile says 10 million people are using iPhones on its network, despite the fact that it has no deal with Apple. The two companies have talked terms in the past, but nothing has been hammered out– and Apple may be losing out on a big chunk of potential subsidies it could receive.

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