Increased spending may have hurt Amazon.com Inc's quarterly profit, dragging down the largest online retailer's shares, but analysts believe the investments the company made will benefit it in the long run.
The fall in Amazon's share price prompted at least five analysts to cut their share-price targets, while one of them downgraded the stock, citing the company's earnings miss.
On Thursday, Amazon reported a quarterly profit that fell well short of Wall Street estimates as it spent a lot on infrastructure -- everything from new staff to fulfillment centers.
Shares fell 14 percent on Thursday. They went down as much as 12 percent Friday morning, but recouped some losses later in the day to trade down 7 percent at $111.4.
Analysts at Credit Suisse said higher investments was a right decision for the long run, given Amazon's attractive prospects and its high return on invested capital, never mind the near-term impact on margins.
The company's investment scales took investors and analysts by surprise. Also, a cut-throat price war in the e-book reader space made Amazon slash prices on its hot selling Kindle, following Apple Inc's launch of its wildly successful iPad.
Citigroup analyst Mark Mahaney said, Investment plans are heavier than we had anticipated. But we believe Amazon is doing this from a position of strength.
The company raked up the best gross margins in the North American market in five years, its international revenue growth is at a five-year high too, and units grew 39 percent over the year, he noted.
Total operating expenses at Amazon rose 40 percent to $6.3 billion, with major increases in its cost of sales, marketing and technology and content investments.
There is a difference between discretionary margin pressure and structural margin pressure, analysts at MKM Partners wrote in a note to clients.
But the company voluntarily took it on, choosing to sacrifice short-term profitability and to market the Kindle more aggressively.
Apart from the iPad, the Kindle competes with Barnes & Noble Inc's Nook and Sony's Reader device.
While this (investments and competition) is pressuring margins and adding volatility to earnings, we find it sensible and recommend purchase, especially for investors who can be patient, analysts at Jefferies said.
However, Caris & Co downgraded the stock to average, and said it could not let the negative-surprise quarter slide, since the company typically trades on rich multiples.
While top-line growth is nothing but exceptional and we welcome Amazon's desire to invest for long-term growth and to develop competitive moats...investors will continue to have concerns on margins and higher capital spending unless trends reversed, Caris said.
(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Vinu Pilakkott)