Amazon Grows Top-Line, but at What Cost?


Amazon ( AMZN ) recently announced its Q1 2011 earnings, in which it reported 38% year-on-year improvement in revenues. Despite the top-line growth, net income declined 32% because of higher shipping, marketing and technology costs. Most of Amazon's value comes from its traditional online retail sales, in which it competes with other large corporations like eBay ( EBAY ), ( OSTK ) and Wal-Mart ( WMT ).

We currently have a price estimate of $199 for Amazon's stock , which is roughly in line with market price.

Product Mix Shifting to Electronics and General Merchandise

Increased unit sales was driven by increased inventory, selection of products and continued efforts to reduce prices. Promotional efforts, like lower shipping rates, were also a factor. Amazon's North American sales grew 45% in Q1 2011 vs. the same period last year, and grew 31% internationally. International sales were hurt by a decline in unit sales in Japan in the wake of the tragic earthquake on March 11. We expect international sales to continue growing as Japan recovers. International sales should ultimately account for more than 50% of Amazon's sales over the long-term.

Sales Costs Increasing

Offers like free shipping have the ability to pump up unit sales. However, the downside effect is an increase in shipping costs to Amazon, which can drag operating margins over the near-term.

However, the long-term picture looks a bit different. Higher sales volumes, improved operating efficiency and better terms from suppliers should raise operating margins in the years ahead.

See our full analysis for Amazon's stock here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AMZN , BBY , EBAY , OSTK , WMT



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