Will Stockholders Tolerate Amazonian Losses?

Amazon.com may be hemorrhaging red ink, but at the same time the growth of its customer base is exploding. Its number of registered customers grew to 10.7 million from about 3.14 million a year earlier. So despite posting a $138 million (US$) loss last week — when it reported the results of its second quarter — its growth strategy is still firmly in place.

In addition, the Seattle-based online merchant’s revenue for the quarter almost tripled to $314.4 million from $116 million a year earlier. But the initial reaction from Wall Street was negative. Shares of Amazon.com plummeted 13 percent as analysts predicted the huge e-marketeer would continue to bleed more red ink in the future.

No Surprise

The losses should have come as no surprise, since Amazon’s chief executive Jeff Bezos has repeatedly warned that while the company continued to ramp up it would need to spend money — especially in it acquisition of other companies. In its second quarter, Amazon.com launched an online auction service and pumped more than $110 million into online retailers including Drugstore.com, Pets.com and HomeGrocer.com. Amazon.com also said it would spend up to $300 million to build warehouses throughout the United States in the next two years.

Japanese Model

While its critics sneer and continuously denigrate its lack of earnings, believers in Amazon.com point to the billions (US$) some Japanese companies have spent in order to establish their beachheads in the United States. They also point out that the Japanese focus on the long-term picture, rather than concentrating on each quarter. To make their case on Amazon’s potential, they point to its latest Nielsen/NetRatings, which shows that in one week the company attracted 2.6 million unique visitors. It also ranked second only to Microsoft Corp. in banner impressions — scoring 69.8 million.

Wal-Mart’s Nemesis

If investors don’t lose heart, some industry experts say that one-day Wal-Mart could find itself soundly challenged by Amazon’s growing potpourri of virtual stores. The fact is, that in just the last 14 months Amazon.com has gone from being an online bookseller to becoming an Internet shopping Mall serving up music, videos, auctions and electronic greeting cards. Just two weeks ago it also entered the toys and electronics business.

In AOL’s Footsteps

Some analysts compare Amazon.com to the once struggling America Online, which earned $156 million (US$) its fourth quarter. They say it’s only a matter of time before Amazon.com’s growing customer base will line its stockholders pockets with gold. The only question is: how much longer will those stockholders be willing to wait?

What do you think? Let’s talk about it.

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