Amazon Earnings: Why Its Razor Thin Profits Don't Matter to the Market

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Amazon.comAmazon (AMZN) just released its fourth-quarter earnings report late Tuesday afternoon, announcing that it had racked up $21.27 billion in sales for the quarter -- an increase of 22% from a year earlier.

Oh, and for all those billions, it managed to squeak out a meager $97 million in profits -- a margin of less than half a percent. And for the first quarter of 2013, it projects somewhere between a $65 million profit and a $285 million loss.

The average consumer might be surprised to learn that Amazon, for all its dominance of the retail landscape, doesn't actually have particularly strong profit margins. For the last several quarters, it's had minuscule operating margins of around 1 percent to 2 percent, and in the third quarter of 2012, it took a loss of $274 million -- in a quarter that it made close to $14 billion in sales.

It's true that Amazon and other online-only retailers beat bricks-and-mortar on price by avoiding the overhead costs associated with physical stores. Still, when you're offering the lowest prices and then shipping for free, there's no way you're going to earn huge margins. And more to the point, Amazon is hardly expense-free: Much of that third-quarter loss was associated with money it sunk into its daily deal site, LivingSocial, and it also made investments in technology infrastructure, fulfillment centers and its rapidly growing cloud services business.

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In other words, Amazon is investing in the future, and though margins have shrunk, its sales have continued to grow like wildfire. But Amazon's share price reflects a general confidence among investors in that strategy: The stock has rebounded nicely since its previous earnings report in October. And after a sharp, brief dip after this report came out -- Amazon did, after all, fall a bit short of expectations -- its shares are back up in late trading.

Contrast that with Apple (AAPL): It rakes in billions in profits, but has seen its share price plummet in recent months. And it's gotten a bit of guff from some quarters about its unwillingness to dip into its huge cash hoard to make investments of its own or issue regular dividends.

We're not about to wade into the AAPL vs. AMZN fight, but know this: Amazon may not be making money hand-over-fist like Apple, but its place atop the online retail heap is quite secure.

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at, and follow him on Twitter at @Brownellorama.

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