Amazon on the Defensive as Investors Flee Again

You've got to hand it to Amazon.com (AMZN) CEO Jeff Bezos. He sticks with his story.

Even before the company capped a disappointing two days Wednesday by reporting disappointing second-quarter results, analysts downgraded its shares. The site itself went down for 40 minutes. And this followed Tuesday's big bummer: Bezos' second-in-command, Joe Galli, flew the coop for the hotter stock climes of VerticalNet (VERT).

But on the conference call with investors and analysts, Bezos addressed what was on everyone's mind (and what helped to drive the stock down 4% during regular trading Wednesday). When several people called investor relations after hearing of Galli's departure, "they were concerned that Joe was the symbol of Amazon.com's drive to profitability, while I serve as the symbol of growth at any cost," he said.

Bezos said that wasn't the case at all, and assured investors that the company is focused on eventually making money (though he wouldn't say just when). He's an advocate of balanced growth, he said more than once, and is completely committed to driving profitability. Margins, he said, have improved to 23.5%.

All Wet Amazon shares taking a bath

Source: BigCharts

But as Amazon's results showed, Galli's departure isn't the only issue worrying investors. The company did beat estimates -- its quarterly loss narrowed to 33 cents a share, while analysts surveyed by First Call/Thomson Financial had expected a loss of 35 cents a share. But, by its own admission, it didn't meet its revenue-growth targets. Amazon's sales during the quarter were $578 million. That's 84% higher than the same quarter a year ago; the company had targeted 90% growth. And compared with the first quarter, revenue barely budged, moving up only $4 million.

In fact, Amazon made its bottom-line targets only by "getting ahead of the curve internally," said CFO Warren Jenson -- i.e., calling all the division heads and telling them to tighten their belts. Such ingenuity didn't seem to please investors. In after-hours trading on Instinet, Amazon traded at 33 13/16, down 2 1/4 from its New York close.

Amazon had a rough day Wednesday. In addition to the brief outage during the morning, Lehman Brothers analyst Holly Becker downgraded its shares from buy to neutral (a takedown of two notches), citing lack of traction in its new businesses, softness in key measures like customer churn rates and average order size and a tough mission over the next two quarters: to boost sales and lower fulfillment costs. (Lehman hasn't done recent underwriting for Amazon.) On Tuesday, Banc of America's Tom Courtney reduced his rating on Amazon shares to buy from strong buy, citing lost confidence in the company's ability to generate speedy growth and Galli's departure. (BofA hasn't done underwriting for Amazon.)

On the conference call, Bezos and Jenson offered evidence to dispute some of those worries, saying that Amazon's electronics store, launched just a year ago, has become the company's fastest-growing store yet, though Bezos conceded that Amazon isn't the first name people think of when they want to buy, say, tools. The company also said repeat customer orders represented 78% of orders in the second quarter, and Bezos said the company would focus on improving that in the future. "Our focus is on increasing sales to existing customers," he said. "That shift is critical because we already have so many customers."

While Amazon expects to be cash-flow positive by the end of the year, the company still hasn't set a target date for the most crucial metric of all: profitability. And until it does, its shares are likely to continue to be whipsawed the way they have been this week. Just think: It's only Wednesday.

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