Big Spending Sends Amazon Income Down and Share Price Plummeting

Amazon unveiled its financial results for the third quarter of 2010, the company's fourth fiscal quarter (FQ). While revenue is on the rise, as always, growing expenses sent income down and caused quite a panic in the stock market. Amazon share prices tanked after the results, which were way below expectations in some key metrics, were published.

"Net sales increased 44% to $10.88 billion [6.8€ billion] in the third quarter, compared with $7.56 billion [4.72€ billion] in third quarter 2010," Amazon said.

"Net income decreased 73% to $63 million [39.3€ million] in the third quarter, or $0.14 [0.08€] per diluted share, compared with net income of $231 million [144.4€ million], or $0.51 [0.31€] per diluted share, in third quarter 2010," it added.

Analysts were expecting $25, 15.6€ cents per share net income and the poor numbers Amazon revealed sent stock plummeting almost 26 percent in after-hours trading. The numbers were below Amazon's own guidance for the quarter.

It's not only the fourth quarter numbers that worry investors, it's the predictions for the current quarter. While Amazon expects record sales, it's also saying that it's possible it will lose money, a lot of money, in FQ1 2012, aka the holiday season.

Amazon expects to make as much $250 million, 156€ million or lose as much as $200 million, 125€ million this quarter.

There are several reasons for the drop in income this quarter and one big one for the next quarter. Amazon has always invested heavily in growth and operated at razor thin margins, sometimes at a loss.

Amazon spent a lot of money on its next generation Kindles, especially the color tablet Kindle Fire, but also acquiring content for its video streaming service. It's also investing a lot in expanding its cloud services and, of course, into more shipment centers.

In the next quarter, when it finally starts shipping the Kindle Fire, it expects record sales. But Amazon is probably selling the Fire at a loss, so the more it gets to consumers, the more money it loses initially. The plan is to recoup it later from digital content sales.