Amazon: 3 Reasons Why You Might Not Want to Call It a Comeback Story

Amazon (NASDAQ:AMZN) has long been known as a company that simply gives customers want they want: great service and a variety of products at attractive prices. Now, Amazon appears to be giving investors what they want as shares of the world’s largest online retailer rebound from a horrific year. Let’s take a look at three reasons why you may or may not want to call it a comeback.

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1. Money

For years, investors overlooked tight margins in favor of impressive sales growth. After all, Amazon always made clear that it operated under the “spend now, reap rewards later” business model. Still, the atmosphere changed last year. Investors grew impatient as losses mounted. In October, Amazon shares plunged 8% in a single day after reporting a net loss of $437 million on $20.6 billion in sales for the third quarter.

Amazon took note and surprised investors in the following quarter. For the three months ended December 31, 2014, Amazon reported a net gain of $214 million, or $0.45 per share. In contrast, Wall Street only expected earnings of $0.17 per share. Furthermore, operating income for the quarter came in at $591 million, up from $510 million in the same period a year earlier. Despite the improvement, you may not want to call it a comeback just yet.

For the full year, Amazon reported a net loss of $241 million, compared to a net gain of $274 million in 2013. Operating income totaled $178 million in 2014, down sharply from $745 million in 2013. While it takes more than one quarter of impressive results to make a trend, Amazon’s future is certainly worth watching.

Source: Amazon

2. Innovation

Amazon is involved in everything from household goods to cloud computing. The company’s shipping methods alone are worthy of recognition. Customers are able to complete entire shopping lists online in a timely manner. For $99 per year, Amazon Prime members enjoy free two-day shipping on millions of items, along with unlimited movies and TV shows with Prime Instant Video and unlimited music with Prime Music. Prime Pantry is even making it cheaper for consumers to receive household goods such as soap, toilet paper, and even snacks.

“When we raised the price of Prime membership last year, we were confident that customers would continue to find it the best bargain in the history of shopping. The data is in and customers agree — on a base of tens of millions, worldwide paid membership grew 53% last year — 50% in the U.S. and even a bit faster outside the U.S.,” said Jeff Bezos, founder and CEO of Amazon.com, in a press release. “Prime is a one-of-a-kind, all-you-can-eat, physical-digital hybrid — in 2014 alone we paid billions of dollars for Prime shipping and invested $1.3 billion in Prime Instant Video. We’ll continue to work hard for our Prime members.”

These figures show that Amazon is still pleasing customers. Amazon also recently announced Prime Now, a new service offering paid one-hour and free two-hour delivery on tens of thousands of daily essentials via a new mobile app. The service is currently available in Manhattan and will expand to other cities this year. Furthermore, Amazon has plans to eventually offer delivery in under 30 minutes using small unmanned aerial vehicles, known as Prime Air.

However, innovation is not always successful or cheap. Amazon is currently experiencing headwinds from the Federal Aviation Administration (FAA). The agency recently said that commercial drones would need to stay within “unaided vision” and must not fly over people. The rules are supposed to be flexible, but as it currently stands, Amazon can’t even test its drones outside. Meanwhile, Amazon took a $170 million charge last year on its Fire Phone, which failed to make a dent in the smartphone market.

Source: StockCharts

3. Performance

The good times came to a screeching halt last year. Amazon shares dropped 22% in 2014, their worst performance since 2008. On the positive, shares continued to find support near $285 and surged significantly higher after the latest earnings release. In fact, shares are now well above the 50-day and 200-day moving averages, a feat not accomplished since late 2013.

Perhaps one of the more interesting developments from the past earnings conference call was a discussion surrounding expenses. Amazon mentioned not once but twice that it’s focusing on reducing costs. “The teams are putting even more energy and attention on driving what we would call fixed expense and variable expense productivity as well as other efficiency projects,” said Amazon CFO Tom Szkutak. He repeated the same statement later in the call almost word for word. A reduction in expenses could provide another boost to Amazon’s bottom line.

Although we don’t know if the rebound in shares will last or if the next big breakthrough in e-commerce will come from Amazon, we do know that the company has a proven track record of pleasing customers. Year after year, Amazon is ranked as one of the most valuable brands in the world, without the caveat of a comeback. That doesn’t appear to be changing anytime soon. Bezos has always been willing to sacrifice the profits of tomorrow for more sales today. Investors thinking about ordering shares will need to figure out how long they are willing to wait for Amazon to deliver profits on a consistent basis.

Follow Eric on Twitter @Mr_Eric_WSCS

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