Amazon's Heavy Investing Eats Into Bottom Line, Shares Drop

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Earns Amazon
Ross D. Franklin/AP
By Deepa Seetharaman

SAN FRANCISCO -- Amazon.com (AMZN) posted a much larger-than-expected loss in the second quarter as it continues its rapid pace of investment in new businesses such as digital content and consumer electronics.

Amazon's stock price has dropped 10 percent so far in 2014, with investors leery of betting on its long-term growth at the expense of little to no profit.

On Thursday, the shares fell another 10 percent in late trade, after the largest U.S. online retailer posted a loss of 27 cents a share, nearly double Wall Street's average estimate for a loss of 15 cents.

The company also forecast an operating loss of between $810 million and $410 million for the third quarter ending in September, a sharp increase from a loss of $25 million a year earlier.

Amazon is investing heavily in new businesses and hardware products, as it prepares to take on major tech rivals from Apple (AAPL) and Google (GOOG) to Netflix (NFLX).

Chief Financial Officer Tom Szkutak said Amazon had a "tremendous amount of opportunities" and its investments were "certainly impacting short-term results."

The company is spending more than $100 million on original video content in the third quarter, a substantial increase compared to last year and the second quarter, Szkutak said.

"We're going to continue to invest on behalf of customers with the understanding that long-term has to come," he said during a call with reporters. "We'll obviously be looking to get great returns on investor capital and high amounts of cash flow.

New products and businesses unveiled this year include a subscription book service, new digital content for its Prime online video service, a TV streaming-box and the upcoming "Fire" smartphone. Amazon is also spending billions of dollars expanding its network of fulfillment centers across the world.

Amazon reported a net loss of $126 million, or 27 cents a share in the second quarter, compared to a loss of $7 million, or 2 cents a share a year earlier. Total operating expenses rose 24 percent to $19.36 billion.

Revenue jumped 23 percent to $19.34 billion, in line with Wall Street's average prediction of $19.3 billion, according to Thomson Reuters I/B/E/S.

Amazon's steep price cuts for its cloud computing service made earlier this year limited growth in its "Other" revenue category, which includes its popular Amazon Web Services division, Szkutak told reporters.

The company's stock fell to $323 in extended trading on the Nasdaq, down from a close of $358.61.

Amazon's Heavy Investing Eats Into Bottom Line, Shares Drop
You've been eyeing that fancy new car (or boat), or you've had your eye on upgrading your home, but you haven't been able to swing the down payment. Well, now you've got the money -- right?

Wrong. Just because you can now pony up a down payment, that doesn't mean you can afford the monthly payments you'll have for many years. By using your raise as a down payment on a purchase you still can't technically afford, you're locking yourself into years of unnecessary stress.
What if you're a renter? Sure, you could move into an apartment that costs $150 more a month. But that will be one more "permanent" expense on your budget. You can't easily get out of a lease if you change your mind, lose your job or decide you want to make a career shift.

Ask yourself if you really need a "better" apartment, or if you have all the space you need now -- in which case, you can use that extra cash each month on other things you really do need.
Now that you're in the money, you may be tempted to live the high life (or, at least, a higher life). Lots of people fall into this trap, and it's known as lifestyle inflation -- upgrading your standard of living with every pay raise so that you never use the money for more sensible things, like saving for retirement or paying down your credit card debt.

It's easy to feel the siren call of dinners at fancy restaurants, huge flat-screen TVs, and golf club memberships -- which seem like must-haves now that you're earning more. But making your lifestyle cushier every time your income rises is a vicious cycle, and it's a lot harder to downgrade to your former lifestyle than you may think. Don't feel compelled to up your spending just because you can.
OK, so you realize you shouldn't buy a fancy living room set or spring for a massive flatscreen -- but what about renting to own? You may not be able to afford to buy these things, but renting to own seems like it would be a decent alternative. Right?

Wrong. While the monthly payments at rent-to-own stores may seem reasonable, what you pay in the long run for a new Xbox or stainless steel refrigerator is much more than it would be if you purchased the item outright. For example, Consumer Reports in 2011 calculated that a Toshiba (TOSBF) laptop that cost $612 to buy outright would cost $1,872 at a rent-to-own store. Just like you shouldn't charge items you can't afford to buy, financing them through a rent-to-own agreement is a road to nowhere.
Speaking of financing purchases you can't afford –- avoid using your windfall as an excuse to buy stock on margin.

What's a margin purchase? If you want to buy a lot of stock, but you don't have enough money to do so, you can open a margin account. You'll only be required to put down the initial margin (similar to a down payment), and the brokerage firm lends you the rest of the money.

The trouble with margin buying -- as with any scenario in which you're trying to get more than you can really afford -- is that the longer you hold onto to this stock, more money you'll fork over in interest. And if you can't make your payments? The securities in your margin account serve as collateral.

The returns (and what if the stock goes down?) aren't worth the risk. If you can't afford to buy the shares on your own, don't buy them.
Remember that deli you've always dreamed of owning (even though you have no idea how to run a deli)? Or your brother-in-law's big wacky idea that he promises just can't fail?

Don't use your new income boost to create the down payment on a business loan for these ideas.

Its one thing to invest in an existing business that's rapidly growing. But don't use your bonus or some accumulated pay raise as a down payment on a business loan for an untested business.

Make sure that if you do choose to invest in a business or business idea, it's one that demonstrates a solid future with solid returns. And remember: You won't lose your shirt if you stick with cash investing, rather than leveraged deals.
You're certainly welcome to loan money to a friend or relative if you want, but if you do, you'd better be ready to kiss that relationship goodbye. The instant someone owes you money, relationships become strained, resentments boil up, and things get weird fast.

If you want to help out someone who's going through a rough patch, you're both better off if you find another way of doing so, like helping them revise their résumé to find a new job or offering to bring some groceries to their house.
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