Amazon.com signalled that the cost of expanding its business would grow at a fast clip during the holiday shopping season, sending shares of the world's largest online retailer down 3.8 per cent.
Amazon is adding centres around the world and spending on technology to support its retail and web services businesses. Those costs will continue throughout the fourth quarter, chief financial officer Tom Szkutak said.
The company has also been spending on television ads for its Kindle electronic reader as it vies with Apple's popular iPad tablet.
For the fourth quarter, which includes the key holiday shopping period, Amazon said operating income could range from $360 million to $560 million, which could put it in a range from a decline of 24 per cent to growth of 18 per cent.
"The holidays are a time when you can earn customers, and what we suspect is Amazon has some promotional plans in place to attempt to acquire new customers through either pricing or shipping specials," said Scott Tilghman, managing director at Hudson Square Research. "What they might be doing is trading a little (bit) of margin for longer term growth opportunity."
Amazon has lately been offering free trials for its Amazon Prime discount shipping program, which charges $79 a year for free shipping, in an attempt to capture more repeat customers before the holidays.
Part of Amazon's long-held strategy is to undercut competitors on price - one that is shared by rival Wal-Mart - as well as to give shoppers perks like free shipping and returns. That has spurred Amazon's sales growth as customers make repeat purchases, but cut into profit margins.
Third-quarter operating margin as a percent of total sales was 3.5 per cent, below the 4.6 per cent a year earlier, and falling short of margins seen in the first two quarters.
Amazon also reported a higher-than-expected third-quarter profit on a 39 per cent jump in revenue. But operating expenses surged more than 40 per cent in the same period.
Michael Koskuba, senior portfolio manager with Victory Capital Management in New York, pointed out that Amazon shares had run up significantly since their last earnings report.
"A little sell-off shouldn't be entirely unexpected," he said of shares. "The story remains quite strong."
Amazon warned of higher costs this summer, when it announced its second-quarter results in July. Higher spending - together with profit that fell short of estimates - spurred a 14 per cent drop in shares.
But the sell-off was short-lived. Since then, the shares have risen 56 per cent, as of yesterday's close.
Bullish investors in Amazon see huge potential for growth, despite a rich valuation of nearly 45 times next year's earnings, as it digs further into the territory of traditional retailers and digital media.
Net income in Amazon's third quarter ended September 30th rose 16 per cent to $231 million, or 51 cents per share, from $199 million, or 45 cents per share, a year earlier. Analysts, on average, expected earnings of 48 cents per share.
Revenue rose 39 per cent to $7.56 billion. That was above the 35 per cent rise to $7.36 billion expected by Wall Street. At the same time, operating expenses rose more than 40 per cent to $7.29 billion.
In North America, third-quarter sales rose 45 per cent. They rose 32 per cent internationally.
Looking ahead, Amazon said it expects sales in its holiday fourth quarter of $12.0 billion to $13.3 billion, which would mean growth of 26 to 40 per cent.
Analysts have been expecting fourth-quarter revenue of $12.3 billion, representing a 29 per cent rise over last year's holiday quarter and near the low end of Amazon's forecast.
Reuters