The Market Turns Against The Past And Future Of E-Commerce

Wall St. did not like the last quarter earnings of Amazon (NASDAQ: AMZN) and it sold off shares of Netflix because of its lackluster forecasts. It would he hard to find companies nearly as successful as these two in their respective markets. Investors turned a blind eye to that.

The common theme in the quarterly results and projection of both firms was their costs.

Netflix made $1.11 EPS on revenue of $718.6 million. Both figures were above forecasts. Netflix also said its future costs would rise because of the expense involved with the acquisition of content. That can be viewed two ways.  One is a potential long-term erosion of margins. Another is Netflix plans to lock-up premium video needed to keep its competitive edge.

Amazon has had a rough past but predicted a bright future. Revenue in the latest quarter was up 38% to $9.86 billion, but net income rose only 33% to $201 million. Amazon must have spent too much money to have such margin compression. But, the e-commerce firm said revenue could rise as much as 47% in the current quarter.  Net income is expected to fall, but only modestly.

What the market does not seem to care about is that Amazon and Netflix are each spending money to cement their positions as market leaders. That usually comes with a cost, at least for awhile. Amazon has bulked up its distribution operations and its cloud computing business although the latter has had some service problems. Netflix will pay to obtain exclusive rights to certain premium content or at least to get films and TV shows onto its network before its competition does. Netflix now competes with cable companies as much as any other businesses. Cable has an entrenched position as a delivery means for content to homes. Netflix has to continue to challenge cable’s head start.

Wall St. has nearly always moved share prices based on short-term news and facts. That habit sometime neglects what the dominant companies in an industry need to do to remain dominant. Those costs may be a risk factor, but they are a necessary investment for market leaders.

Douglas A. McIntyre