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TheStreet Open House

My Amazon Mistake

Stocks in this article: AMZNAAPLNFLXGOOGBBRY

The company showed improved shipping performance/costs. Amazon also did well by focusing on higher value services, or those that generate the most profits. As a result, gross margin advanced by three and a half points. Likewise, pro forma operating income increased 47% while operating income rose 56%, both of which led to a margin improvement of a half point.

This was certainly an excellent performance, for which Amazon's CEO Jeff Bezos offered the following:

We're now seeing the transition we've been expecting. After five years, eBooks is a multi-billion-dollar category for us and growing fast -- up approximately 70% last year.
In contrast, our physical book sales experienced the lowest December growth rate in our 17 years as a bookseller, up just 5%. We're excited and very grateful to our customers for their response to Kindle and our ever-expanding ecosystem and selection.

While the deterioration of the physical book business is not a surprise, the 70% surge in the eBooks certainly is. It's no coincidence that Bezos is still raving about the popularity of the Kindle Fire. As noted, profitability has been the most popular bear argument.

For instance, although Amazon sells millions of its popular tablet, the company takes a loss on each unit sold. But this has to do with Amazon's infrastructure builds, which is working perfectly as evident by the 70% growth in eBooks.

The Kindle Fire has become one of the real threats to Apple's iPad dominance. Amazon's Prime movie streaming business continues to gain traction on Netflix (NFLX). So Amazon may not want to disrupt its ecosystem with price increases.

I think this makes sense given Netflix's recent subscriber surge in Q4 -- including adding over two million domestic streaming subscribers plus 1.81 million internationally. Besides, with Netflix growing so quickly, it will continue to be the subject of M&A debates including Google (GOOG), which owns YouTube and has its own TV ambitions.


With rumors of an Amazon phone still swirling, there are plenty of gains to be had and plenty of growth opportunities ahead. The phone scenario is interesting -- as analysts insist the device will be launched by the second half of the year, it is not yet certain which operating system Amazon will use for its phones.

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