Amazon spooks investors with big spending ahead of holidays

Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City on Jan 29, 2016.
Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City on Jan 29, 2016. PHOTO: REUTERS

SEATTLE (Bloomberg) - reminded investors it's still willing to spend lavishly on products or areas that could be the next big thing - whether video streaming, automated personal assistants or a toehold in emerging markets - even if it means thinner profit margins and a weaker stock price.

Amazon reported third-quarter earnings on Thursday that missed analysts estimates on increased spending and forecast that it might not make a dime on holiday sales expected to top US$40 billion.

The world's biggest online retailer will continue to win market share by offering quick delivery of an ever-growing assortment of goods. And it will continue to spend on the things that make its customers loyal: warehouses near their homes, original video shows to watch and devices that make their lives easier.

Amazon's operating expenses increased 29 per cent in the third quarter to US$32.1 billion, primarily on video programming and new warehouses.

The costs included investments in India, refinements to voice-activated Amazon Echo products and construction of new data centers for Amazon Web Services, the company's cloud-computing division.

"We will continue to invest in the business where we see significant customer traction," Chief financial officer Brian Olsavsky told analysts, offering no clarity on whether the uptick is temporary or a return to the kind of significant investment cycle Amazon has experienced in the past.

Amazon added nearly 40,000 positions in the third quarter to reach 306,800 employees, including those who pack boxes in its new warehouses and develop marketing plans for its original movies and shows.

Investors, however, had been expecting the company to continue this year's pattern of widening profit margins complementing robust sales growth.

Those expectations had boosted Amazon stock 25 per cent and made chief executive officer Jeff Bezos the world's third-wealthiest person. The stepped up third-quarter spending helped send the stock tumbling as much as 9 per cent in extended trading.

"This is all about costs," said Michael Pachter, an analyst at Wedbush Securities, who thinks the bigger spending on video shows Amazon will keep applying the pressure to Netflix.

The quarterly results contrast the near-term interests of Wall Street with the long-term outlook of Amazon's founder, who, in addition to the company's history of taking the long view has been investing his personal wealth in space exploration with a goal of helping millions of people live and work in space.

Mr Olsavsky told investors Amazon would continue to invest "pointedly and wisely" in new initiatives that enhance the customer experience, hoping to find successes like its fast-growing and profitable cloud-computing segment and its US$99-a-year Prime membership that converts occasional Amazon shoppers into its most loyal customers and biggest spenders.

"We have said investments are going to be lumpy," he said. "They are going to be high sometimes and they'll be moderate at other times."