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Amazon Making All the Right Long-Term Moves


It's easy to complain about Amazon hitting a rough patch, but it's obvious the company is doing so voluntarily so it can succeed in the future.

PrintPRINT (AMZN), the 800-pound gorilla of online retailing, delivered its third-quarter earnings report after the closing bell on Thursday.

Let's first take a brief look at the numbers you need to know:

1. Revenues rose 39% to $7.56 billion, which was ahead of Wall Street's consensus estimate calling for $7.36 billion in sales.
2. Earnings came in at $0.51 a share, beating estimates by $0.03 a share.
3. Fourth-quarter revenue guidance was ahead of expectations at $12 billion to $13.3 billion.
4. The cheap new $139 Kindle e-book reader had the best launch sales of any Kindle in Amazon history.
5. Amazon's fourth-quarter operating income guidance of $360 to $560 million was a major disappointment .

Obviously, item number five is the culprit behind the post-report decline in Amazon's stock price -- and the very reason why I'm confident in the company's ability to succeed over the long term.

It may seem counter-intuitive. There's rarely, if ever, any reason to be encouraged by negative margin trends, but look at it this way: Amazon is putting in place the blocks it will need to succeed over the long run.

Let's look at where all the money is going.

The main drag is Amazon's opening of new fulfillment centers that it needs to keep up its blistering revenue growth. Remember, online retail isn't an endlessly scalable business whose only incremental cost is bandwidth; Amazon needs a lot of bricks and a lot of mortar to continue expanding.

Amazon is seeing e-books explode to the point where they're overtaking sales of hardcover books, so score one for the virtual side of the business. But Amazon's sales of physical products like consumer electronics are skyrocketing as well. That means warehouses with forklifts and loading docks.

Secondly, Amazon is taking a hit on that $139 Kindle, but it's worth it. Every Kindle device sold represents a chance to generate repeat business on Amazon's platform. The Kindle acts as Apple's (AAPL) iPad does: It brings people back to its creator to spend more money on digitally distributed content.

And finally, Amazon is spending a lot of dough on marketing, with the final tally for the quarter rising 62% year-over-year to $241. That's way ahead of the company's 39% revenue growth rate for the quarter.

It's easy to bellyache over the fact that Amazon's hitting a rough patch, but it's obvious that the company is doing so voluntarily so it can succeed in the future.

This is vital because 20 years from now, Amazon could be the size of Walmart (WMT) -- literally 10 times as big as it is today.

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No positions in stocks mentioned.
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