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Stock Analyst Update

Amazon's Lukewarm Quarter Fails to Impress

Revenue growth is soft, but cash position remains solid.

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E-tailing giant Amazon.com (AMZN) just can't catch a break this week. On Tuesday, its president unexpectedly resigned. On Wednesday, its site crashed and its stock fell when a Wall Street analyst issued a critical report. To top it all off, after Wednesday's market close, Amazon reported lukewarm second-quarter results that sent the stock down further in afterhours trading. While the company technically beat Wall Street earnings estimates by $0.02 with a pro forma loss of $0.33 a share, its overall results were mildly disappointing and left many questions hanging.

The most notable disappointment was revenue. While Amazon's quarterly revenue of $578 million was 84% higher than year-ago numbers, it was basically flat from the first quarter of this year and below most analysts' projections. Chief financial officer Warren Jenson acknowledged that the company's internal projections called for close to $600 million this quarter, but he tap-danced around reasons for the shortfall, simply saying that these things are hard to predict.

Chief Executive Officer Jeff Bezos also downplayed the soft revenue numbers, saying that Amazon's best future growth will come outside the United States. Sales at Amazon's British and German sites grew 134% from last June, and the company plans to open sites tailored to other countries soon. Bezos and Jenson also stressed strong growth in new products--especially home electronics--and increased sales to existing customers. Still, growth in the core U.S. book, music, and video business, which accounts for two thirds of Amazon's revenue, slowed from 50% last quarter to 33% this quarter.

Amazon showed some improvement in profitability, which Bezos had said would be the primary focus this year. The U.S. book, music, and video business finally showed a profit, and overall gross margins improved slightly to 23.5%. But progress has been slow. Although operating losses declined to 15% of revenues from last quarter's 17%, Amazon may be hard-pressed to reach its goal of single-digit operating losses by the end of this year.

On the negative side, Amazon's inventories were unchanged from their already-high levels of last quarter and are expected to increase next quarter as the company prepares for Christmas. And the Amazon Commerce Network, the much vaunted collection of partnerships with smaller specialty e-tailers, has been a disaster so far: Amazon's losses from these partnerships totaled $110 million, more than its operating loss of $89 million.

Still, Amazon is not about to run out of money, as some have feared. It has $908 million in cash, down from $1 billion three months ago, and plans to return to the $1 billion mark by the end of the year. This quarter's tepid results suggest that Amazon may have been overly optimistic in planning its drive toward profitability, but it has some time to work out the kinks. Amazon's short-term future is very uncertain, but over the long haul, its dominant position among e-tailers makes it a near-certain survivor in the coming dot-com shakeout.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.