Amazon has been on a spending spree.
Over the past few months, it has expanded its grocery service in New York, released a smartphone (that no one is buying), purchased a video game company for nearly $1 billion, is hiring like crazy at both its distribution centers and its Seattle headquarters, and continues to add expensive perks, like video and music streaming, to its Amazon Prime subscriptions.
On Thursday, investors will be listening to the company’s third-quarter earnings report for any clues on how the company expects to make a profit — down the road — when it continues to spend as heavily as it does.
Already, the skepticism is there, with Amazon’s shares falling 23 percent since the beginning of the year.
Analysts are expecting Amazon to report a loss of 74 cents a share, which is wider than the year-ago loss of 9 cents, according to FactSet. Analysts are also expecting Amazon’s sales to rise to $20.8 billion, which falls in the mid-range of Amazon’s own projections of $19.7 to $21.5 billion.
Wedbush analyst Michael Pachter said in a note to investors that he expects an operating loss of $410 million, which is at the high point of Amazon’s supplied range of $810 to $410 million. (This compares to a much narrower loss of $25 million in the third quarter 2013.)
But Amazon’s earnings are notoriously unpredictable, and guessing Thursday’s results in advance are usually done with an asterisk.
“We expect a variety of customer experience enhancements to have soaked up gross profit dollar growth,” Pachter said, adding that “Amazon continues to spend on Prime member enhancements and marketing new product launches.”
Some of the largest investments have occurred on the content side of the business.
This summer, Amazon acquired Twitch Interactive, a popular platform for watching or broadcasting people playing video games, for $970 million in cash. Pachter also estimates that Amazon is spending Prime Music, Amazon’s the streaming music service that competes with Pandora and Spotify, to cost roughly $100 million a year for rights. Likewise, Prime Instant Video may cost the e-commerce company roughly $1.5 billion a year with total content spending to exceed $2 billion this year and $2.5 billion in 2015.
Amazon has also been busy investing in its traditional business, and by traditional business, we mean e-commerce, where you buy something online that Amazon or another retailer ends up shipping to you.
The company is leaning on the U.S. Postal Service to speed up delivery, adding Sunday delivery to 25 percent of the U.S. population. It also entered a pilot program with the postal service to test grocery delivery. In New York, it rolled out its own fleet of drivers for the delivery of food and other products that are stored nearby, like it has in Seattle, San Francisco and Los Angeles. Farther out on the horizon, Amazon has more experimental programs focused on drones, and it may soon be dabbling in physical retail stores (at least for the holidays).
The increased investments may be coming at just the right time, however, with dozens of competitors close on its heels. One example includes how last week Google launched its same-day delivery service in three new markets and unveiled a new pricing scheme that offers very competitive rates, compared to Amazon Prime.
Investors are unlikely to get detailed explanations during Thursday’s call.
Although that could be changing, too. Last month, Tom Szkutak, Amazon’s chief financial officer for the past 12 years, said he was retiring next summer.
He is being replaced by Brian Olsavsky, who is currently VP of finance for the company’s global consumer business. Up until now, Szkutak is typically the highest ranking executive on earnings calls. If it is Olsavsky going forward, then maybe we’ll hear a new approach to how Amazon defends its notoriously thin or non-existent profit margins.
Investors can always hope.