This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Will Amazon's Real Gross Margin Please Stand Up?

And now this:

  • Jungle logic: Amazon.com (AMZN) may have beaten revenue expectations and turned in a narrower-than-expected loss for the first quarter, but the real story to some investors is gross margins, one sign of how well run and potentially profitable a company really is. The fatter the margins, the better. And on the surface, Amazon's margins weighed in at an impressive 22.3%, up from 13% in the previous quarter.

    But dig deeper into the numbers and there are reasons to believe that the real gross margin is more like a paltry 1.2%.

    The actual size of Amazon's real margins depends on two things. First is whether you include revenue from a series of recent marketing deals with upstart companies that aren't making any money. Short-sellers don't think you should, because those companies are not really part of Amazon. By not including those revenues, the gross margin would be more like 18.5%.

    More important is whether you include fulfillment costs in the gross-margin calculation. Doing so would chop another 17 percentage points off margins, bringing the actual number down to around 1.2%. The reason this is so important is because like many e-commerce companies, Amazon currently expenses fulfillment costs (the cost of filling orders) as they occur and doesn't include them as part of the cost of sales, which determines a company's gross margin.

    But, as Amazon itself warns, it may have to adjust its accounting and classification of fulfillment costs as a result of an ongoing debate in the accounting industry over whether fulfillment costs should be treated as a cost of doing business, and thereby included as a cost of sales.

    Particularly disturbing this quarter is that fulfillment costs actually rose a percentage point from last quarter.

    Bottom line, according to one skeptic who is short Amazon stock: "They're selling books, DVDs, consumer electronics and everything else for barely above cost."

    In which case, no matter what the company says, profitability is hardly around the corner.

  • Confess as we must do: An item earlier the other day on StarTek (SRT) had several important numbers that were off.

    The column said that the growth in Microsoft's (MSFT) biz with StarTek had slowed to 16% in the fourth quarter from roughly 100% in each of the prior three quarters. In reality (thanks to poor numbers crunching by a normally impeccable source, I say with a red face) year-over-year sales growth from Microsoft fell to 6% in the fourth quarter, after rising 76.6% in the third quarter, 132% in the second quarter and 105% in last year's first quarter. (Sure, that's worse than the column said it was, but keep reading.)

    The column also said that StarTek's non-Microsoft business in the fourth quarter had actually fallen by 6% -- the second-straight quarterly decline. Oops, it actually rose by 26%, and there had been no decline in the prior quarter. This is where things get murky, because the column reported that a decline in non-Microsoft sales was "especially troubling" in light of the way Wall Street had tagged StarTek as an e-commerce play. It's e-commerce in part, because its employees are hired to fill e-commerce orders and it is a minority partner with Reader's Digest (RDA) in a small Internet company.

    Still, even with the correct numbers, the story doesn't change for several reasons:

    First, there's the Microsoft connection: Sales growth from Microsoft is continuing to slow. Just how much is hard to say. The company, which reported earnings early Tuesday, doesn't hold conference calls. StarTek Chairman Emmet Stephenson told my assistant, Mark Martinez, on Wednesday that he didn't know the Microsoft numbers because the calculations hadn't been finalized. (Then how could they calculate the earnings? But I digress.) What he did say is that Microsoft's percentage of overall sales is going to be down, "and not insignificantly."

    Next is the nature of its most-recent quarterly results: Revs were a few million bucks lower than expectations, but earnings were higher. How'd that happen? Stephenson attributes it to higher-margin, non-Microsoft biz, which sounds great, but most of that high-margin biz, according to what Stephenson told Martinez, was coming from doing installations and maintenance for a large telecom company, which he declined to identify.

    In other words, here's a company that trades at 36 times this year's expected earnings. By contrast, sales for AHL Services (AHLS), which also outsources for mundane jobs -- including e-fulfillment -- are almost triple StarTek's, yet it trades at just seven times this year's expected earnings. Sure, AHL recently blew a quarter, but to short-sellers, outsourcing is outsourcing, and no matter where their employees go, there's no way to justify a high-tech multiple for a low-tech biz.

  • Transaction complete: Tuesday's 47% decline in Transaction Systems Architects (TSAI), after reporting lousy earnings, was no surprise to readers of this column, but it was to a team of Credit Suisse First Boston analysts that upgraded the stock a month ago.

    Tuesday, they conceded that the upgrade was "obviously premature and wrong given performance." But then they kept their "strong buy" in place while slashing estimates for this year and next. Why not drop the recommendation along with the upgrade? What, and risk the prospects of future investment banking biz from a company that has signaled that there are likely to be some deals in its future? Get real!

    As originally published, this story contained an error. Please see Corrections and Clarifications .

    Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at herb@thestreet.com . Greenberg also writes a monthly column for Fortune.

    Mark Martinez assisted with the reporting of this column.

    Check Out Our Best Services for Investors

    Action Alerts PLUS

    Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    Quant Ratings

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    Stocks Under $10

    David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    14-Days Free
    Only $9.95
    14-Days Free
    Dividend Stock Advisor

    David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Updates with exact steps to take - BUY, HOLD, SELL
    Trifecta Stocks

    Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

    Product Features:
    • Model Portfolio
    • Intra Day Trade alerts
    • Access to Quant Ratings
    Options Profits

    Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • Actionable options commentary and news
    • Real-time trading community
    SYM TRADE IT LAST %CHG
    AAPL $113.29 0.00%
    FB $91.01 0.00%
    GOOG $630.38 0.00%
    TSLA $248.48 0.00%
    YHOO $33.14 0.00%

    Markets

    Chart of I:DJI
    DOW 16,643.01 -11.76 -0.07%
    S&P 500 1,988.87 +1.21 0.06%
    NASDAQ 4,828.3250 +15.6170 0.32%

    Free Reports

    Top Rated Stocks Top Rated Funds Top Rated ETFs