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Amazon rides a razor-thin wave back to profit in first full quarter of new Kindles

Bezos Kindle Fire

Amazon nailed its own projections on sales revenue and whipped right past them back to an operating income gain of $405 million in the fourth quarter of 2012. In total, Amazon posted a net income of a positive $97 million for the quarter, canceling out some of its earlier losses for net loss of $39 million for fiscal 2012.

These results meet or beat Amazon's own projections, although the net sales are lower than analysts' estimate of $22.3 billion. And it is much better than last quarter's operating loss. Significantly, it's more operating income (the ordinary profit and loss from Amazon's business) than last year's holiday quarter of $260 million. The net profits are down year-over-year from $177 to $97 million, but that's largely due to much bigger corporate writedowns, equity investments, and provisions for income tax — the accounting stuff that costs real money, but doesn't tell you much about how Amazon does what it does. Amazon hasn't made this much money buying and selling things since the holiday quarter in 2010.

The most money Amazon's made buying and selling products in two years

CEO Jeff Bezos noted that this quarter's results show Amazon's business itself is changing. "We're now seeing the transition we've been expecting," he said. "After 5 years, e-books is a multi-billion dollar category for us and growing fast — up approximately 70 percent last year. In contrast, our physical book sales experienced the lowest December growth rate in our 17 years as a book seller, up just 5 percent. We're excited and very grateful to our customers for their response to Kindle and our ever expanding ecosystem and selection."

Other e-readers might be soft, but e-reading remains strong

"Our approach is to work hard to charge less," Bezos wrote in October. "Sell devices near breakeven and you can pack a lot of sophisticated hardware into a very low price point." That's the philosophy of Amazon's entire business, not just its Kindles: high volume, low margins, maximum synergy. Sell anything you can, as much as you can, for as little as you can, to remain the retail provider of first resort.

This was the first full quarter of Amazon selling its new line of Kindle, Kindle Paperwhite, and Kindle Fire devices. There's been some softness in the dedicated e-reader market, but Amazon's tablets have generally been regarded as a hit. On the earnings call, Amazon also noted that its Kindle Paperwhite was supply-constrained through December, and that many more Paperwhites could have been sold if the company could have kept up with demand. (Amazon never releases its unit sales for hardware, much to the chagrin of we who would like to track such things.) This was also the holiday quarter, always Amazon's biggest for consumer electronics and overall retail. So these results were expected to be big; the only uncertainty was just how big they would be.

In October, Amazon gave its traditionally broad guidance range for the next quarter, predicting net sales between $20.25 billion and $22.75 billion, and operating income somewhere between a loss of $490 million and a gain of $310 million. Investors didn't care about the uncertainty or low profits, driving Amazon's share price to new records, hitting a high of over $284 last last week before falling back below $270 before the earnings were released. (In after-hours trading on Tuesday, the stock was back up to $284 after hitting a brief high of $290.)

Amazon's low margins make it harder to undercut than Apple

Amazon's results reflect its business philosophy, and provide a sharp contrast with those of Apple. Apple posted a record quarter that was still disappointing by the unprecedented standards it's set for growth and profit. Apple is a high-margin hardware company that's somehow become the biggest technology company in the world; Amazon is a low-margin retailer that is trying to become a similarly universal global presence. As ex-Amazon employee Eugene Wei points out, Amazon's low-margin philosophy leaves much less room for existing or emergent competitors to undercut the company on price.

Apple hit its own projections but got fiercely punished by traders for missing theirs. Amazon hit its projections, missed analysts' guesses, and has a negative price to earnings ratio after posting a net loss on the year — but for Amazon Wall Street is climbing aboard the train.

Let's not pretend this is entirely rational. Right now, Amazon has a better narrative than Apple, with founder still in charge, growth looking solid, and the lean, invest every cent of profit in the company model having carried it this far. Is the global, prestige-obsessed middle class large enough to keep Apple afloat? Where is Tim Cook's big idea that completely differentiates Apple from Samsung With Apple's continued growth prospects suddenly less certain, Amazon looks to everyone like the tech world's only unstoppable monster.

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