Can Amazon.com Sustain Momentum?

The headline on an Associated Press story said: Amazon.com Expects Small Loss.

While I would be hard-pressed to label as “small” a $255 million net loss, investors were impressed, as Amazon.com shares soared 33.6% to $11.18 in Monday’s trading.

Their reaction is understandable. The online e-tail leader’s projected net loss of 22 cents per share for the first quarter is well below Wall Street estimates calling for a Q1 per share loss of 30 cents.

Further, AMZN’s projected Q1 loss is 17% lower than the $308.4 million net loss in last year’s first quarter. That’s a considerable improvement in the bottom line, especially given how much the economy has deteriorated since early 2000.

Company officials credit cost-cutting measures such as layoffs and better inventory control. But Amazon.com also increased revenue to $695 million from $574 million in Q1 2000, a 21% gain, with strong growth coming from its international units.

In a conference call, Amazon.com CFO Warren Jenson said, “In my opinion, operationally, this is the best quarter in our history.” And that may well be true. However, if Amazon.com truly intends to meet its goal of profitability by the fourth quarter of this year, it must whittle down $255 million in quarterly deficits over the next three quarters.

Even in the best of times, that’s a stiff challenge. With visibility past June nil, Amazon.com is entering uncharted territory as the economy downshifts. Yet investors acted — or overreacted — on Monday as though
better-than-expected Q1 numbers translated into certain profits by year’s end.

They don’t. In fact, AMZN’s net loss easily could widen in Q2. That’s what happened last year: Second-quarter net loss was $317.2 million, up 2.9% from the $308.4 million of the prior quarter.

I don’t mean to diminish Amazon.com’s achievement in Q1. Righting the ship during a storm is hard to do, and AMZN made great strides in that direction in the first quarter. Still, its 21% revenue growth over the year-ago quarter is the smallest in the company’s history. Clearly Amazon.com can no longer rely on its initial strategy of growing itself into profitability. (Hence the cost-cutting.)

Amazon.com has earned its reputation as the world’s top e-tailer. It provides a highly satisfying online experience for consumers. But it also has earned its skeptics by continually failing to move significantly toward profitability.

Q1 was a good start. I think Q2 will give us a better indication of which direction Amazon.com is headed.