Amazon stock sank today after the company posted its first quarterly loss since 2003. It was no small stumble, either. The Seattle-based company reported a loss of $274 million. The 60-cents-per-share loss greatly exceeded the 8-cents-per-share loss Thomson Reuters analysts had forecast. Amazon can blame $169 million of its $274-million net loss on its 29-percent stake in daily deal partner LivingSocial.
At the height of the daily deal hubbub in late 2010, when Groupon was at the peak of its growth spurt, Amazon invested $175 million in LivingSocial. Since then Groupon shares have dropped by about three-quarters, and Amazon has had second thoughts. Bloomberg reports LivingSocial has lost about 95 percent of its value since Amazon’s original investment.
In a memo obtained by Reuters, LivingSocial chief executive Tim O’Shaughnessy said when it comes to Amazon’s loss, there is more to the story.
According to the memo, while LivingSocial’s third-quarter revenue was about $124 million, its operating expenses amounted to about $193 million. The company suffered an operating loss of $565 million, and posted a net loss for the quarter of about $566 million.
But more than 95 percent of LivingSocial’s losses were related to non-cash items, O’Shaughnessy wrote, the largest—$496 million—resulted from writing down the value of last year’s acquired companies.
“The market has also dropped over that same time for similar public tech companies,” O’Shaughnessy wrote. “Those changes in valuation showed up as an ‘impairment’ in our financial statements, but they do not affect the day-in, day-out operations of the business.”
O’Shaughnessy argued, however, that LivingSocial posted a profit for the month of September—its first positive cash flow since 2009—and has gained market share from Groupon between August and September.
Excluding the LivingSocial damage, Amazon still suffered a 23-cents-per-share loss, dropping more than analysts’ expectations.
In an Oct. 25 conference call with analysts, Amazon chief financial officer Tom Szkutak said the loss was the result of the company’s efforts to increase its overseas presence. He also attributed the shortfall to investments in new video content and additional Kindle and tablet product offering. In fact, technology spending increased 55 percent over the past quarter.
“You shouldn’t be expecting high returns of investment capital in the short term,” Szkutak said, “but it’s very exciting in a long-term perspective.”
The future looks promising for Amazon’s Kindle business. It rolled out seven new Kindle models last month, and now boasts a product line ranging from a $69 basic reader to a $599 Kindle Fire HD. Amazon has acknowledged, however, the Kindle line itself is not profitable. Instead, the company hopes to profit by selling apps, e-books and movies, all with high profit margins.
“Our approach is to work hard to charge less,” Amazon founder and chief executive Jeff Bezos said in a statement Oct. 25. “Sell devices near break even, and you can pack a lot of sophisticated hardware into a very low price point.”
Amazon is also opening 19 fulfillment centers globally, in efforts to speed product delivery to customers during the holiday shopping season. The additional centers accounted for 28 percent of Apple’s increased operating expenses.
“Amazon is spending a lot to gain market share,” Forrester Research analyst Sucharita Mulpuru told Bloomberg. “They’re obviously, as they call it, investing in the business—everyone else would call it losing money.”
