Q4 Looms Large for Amazon.com

It’s become a familiar scenario: Amazon.com announces record
quarterly revenues but warns of heavier future losses.

And once again the market reacted with dismay, as (AMZN) shares fell in
after-hours trading Wednesday to 72-3/4 from the 75 15/16 closing price.
The stock was trading Thursday afternoon at 70 7/8, and had traded as
low as 65 7/8 in the morning.

After Wednesday’s trading ended, Amazon.com reported Q3 revenues of $356
million, up 131% from the $154 million in last year’s third quarter. The
net loss grew even faster than revenues, however, rising to $197 million
from $45 million in Q3 ’98, an increase of 338%.

The company was quick to point out that the net loss included $111 in
one-time charges for acquisitions, investments and stock-related
compensation. (This, of course, is a somewhat specious argument in that
Amazon.com undoubtedly will incur similar costs in future quarters; only
the names will change.)

But the real sticking point for Wall Street was Amazon.com CEO Jeff
Bezos’ warning that the company would spend heavily on advertising and
promotion in the fourth quarter – in excess of $100 million, some
analysts estimate — pushing back yet further the time when losses will
begin shrinking and profitability in sight.

Bezos positioned the decision to triple marketing spending in Q4 as an
aggressive bid to capture mindshare as the holiday selling season
begins.

No doubt many investors wonder if Amazon.com truly needs to shell out
$100 million to promote its site, and you can’t blame them. Along with
America Online Inc. (AOL), Amazon is one of the two most recognizable brands on the Internet.
If it doesn’t have mindshare now, what good is $100 million in ads going
to do?

Well, the truth is they could do plenty of good. The first objective in
e-commerce is to gain mindshare; the next is to keep it. Amazon.com is
facing increased competition as the holiday season approaches. Other
large Internet players and bricks-and-mortar giants are battling to get
a piece of the e-tail market currently dominated by the online seller of
books, videos and an ever-growing list of other products. Advertising
makes sense, especially in the non-Internet media (print, radio and
television; remember them?), where the future e-commerce customers are
and where Amazon.com is likely to spend its money.

But it’s fair to ask if there are diminishing returns to such an costly
ad blitz, and Amazon.com will be under pressure to show in its Q4 report
if there was a return on that investment.

The company will be under even more pressure to back up Bezos’ comment
during a conference call Wednesday that the Amazon.com expects its U.S.
book business to show a profit in Q4. Since books comprise more than
half of the company’s revenues, this rightly would boost confidence in
Amazon.com’s business model.

News reports about Amazon.com’s Q3 earnings have characterized
shareholders as “frustrated” and “impatient” over the company’s growing
losses. If the company misses its numbers for Q4, it risks a shareholder
backlash.


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