Amazon dealt $250-billion blow from market jitters and confusion

Fears of a prolonged market downturn, slowing international sales, stepped-up competition in the U.S. and flat-out confusion about how Amazon.com Inc. makes money are all reasons behind the company’s dizzying 25-per-cent drop in value from its September high.

The world’s largest online retailer had been an investor darling, with shares more than doubling over the past two years on optimism that Amazon would continue to gobble up sales while increasing profitability. Enthusiasm about Amazon’s sustained growth made chief executive Jeff Bezos the world’s wealthiest man and Amazon the second U.S. company to reach US$1 trillion in market value, albeit briefly.

But the quarterly results published Thursday told a different story. Amazon issued a disappointing revenue and profit forecast for the busy holiday period. The investor shock has only intensified since then and the shares have now lost one quarter of their value since hitting a record high last month of $2,039.51. Amazon’s market value has shed about US$250 billion since that US$1-trillion milestone.

Adding to Amazon’s woes are a proposed digital business tax in Europe and further talk of tariffs that could dent consumer spending. Those factors combined to persuade some investors that now is the time to cash out on their Amazon bounty.

“Investors are looking to sell their year-to-date winners — Amazon was up 52 per cent before the report — and Amazon gave them an excuse,” said Colin Sebastian, an analyst at Robert W. Baird & Co.

Amazon last week forecast revenue of as much as US$72.5 billion in the current quarter, falling short of analysts’ average estimate of US$73.8 billion. The outlook and third-quarter results, which showed slowing sales growth in all major revenue categories including international and cloud computing, prompted investors to question whether the company is reaching a saturation point.

Investors suddenly have a lot more risk to consider when assessing company value, and Amazon’s results showed investments by competitors could be taking a toll, said Allen Gillespie, an analyst at FinTrust Capital Advisors. “Amazon is now seeing more competition from Walmart.”

Fears of slowing growth could be misguided due to misunderstanding about how Amazon makes money, said Michael Pachter, an analyst at Wedbush Securities Inc. Amazon is a retailer that sells goods directly to consumers and a marketplace acting as a middleman between online merchants and shoppers. Marketplace sales are more profitable for Amazon even though it records less revenue on those transactions.