Margin shortfall hammers Amazon shares

Online retailer reports higher-than-expected cost of sales in Q4

Whatever excitement shareholders of (NASDAQ: AMZN) felt after the online retailer's stock gained 5.2 percent in regular trading quickly evaporated after hours following the company's fourth quarter earnings report that showed lower operating margins than expected. In its announcement, Amazon highlighted its 36 percent increase in Q4 sales from a year ago, but Wall Street only saw shrinking margins and an expectation for lower-than-expected operating income in the first quarter. (Also see: Amazon joins list of Internet stock all-time high-fliers) Amazon shares fell nearly 11 percent after hours to 164.50 after closing Thursday at 184.45, not far off from an all-time high of 191.60 set just nine days ago. The online retailer's Q4 net income rose 8% to $416 million, or 91 cents a share, from $384 million, or 85 cents a share in the year-ago quarter. Revenue soared 36 percent to $12.95 billion from $9.52 billion in the fourth quarter of 2009. Wall Street was expecting quarterly earnings of 88 cents a share and sales of $13 billion. One hit and one miss there. But the real disappointment was the quarterly operating margin and forecast for Q1 margins. Amazon's fourth quarter operating margin of 3.8 percent was well below expectations of 4.2 percent, while the company's Q1 guidance of a margin range between 2.9 percent and 3.9 percent also fell far short of the 5 percent margins anticipated by analysts. For the entire year, Amazon's revenue was $34.20 billion, up 40 percent from the $24.51 billion in 2009, while earnings were $1.15 billion, or $2.53 a share, a gain of 28 percent over 2009's profit of $902 million, or $2.04 a share. In the silver lining department, Amazon's Kindle strategy continues to pay off. The company reported that it now sells more Kindle ebooks than paperback books.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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