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Developing Own Delivery System Cuts Amazon’s Fourth Quarter Profit While Increasing Fixed Assets

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January 30
3:22 AM 2016

Amazon, the Seattle-based ecommerce company's share price has tumbled by 11% in the after market trading on Thursday. The price fall has taken place apparently due to weaker than expected profit earnings during the fourth quarter.

The company has reportedly posted net income of $482 million in the fourth quarter, compared with $214 million during the same period of previous year. The earning per share (EPS) for this quarter has been estimated to $1 compared with $0.45 a year ago. The EPS has fallen sharply below analysts' predictions for $1.55, reports Zero Hedge.

The ecommerce giant has posted net sales of $37.5 billion, which is 26% higher from a year earlier. With the surge in sales, Amazon has managed to pass the $100 billion mark during the whole year for the first time in its history, reports Financial Times.

Amazon's closedly watched cloud computing business has reported whole year sales of $7.9 billion which is 70% higher than the previous year. The unit has achieved the highest profit margins than any other Amazon segment with an operating income of $1.9 billion during 2015.

On the spending scenario, operating expenses have increased 21% to $34.6 billion. Balancing the expenditure figure has appeared to be the biggest challenge for Jeff Bezos, the Amazon CEO to balance Wall Street's thirst for profits.

The challenge may suppress Bezo's ambitious planning for using new sophisticated technologies like unmanned drones and intelligent household gadgets. Even his eagerness for replicating his success in the US market to abroad may also be hit seriously.

Analysts have blamed the rising cost in delivering goods as the reason behind the profit fall. The delivery cost has increased to $4.5 billion during the fourth quarter which is 24.4% higher compared the same quarter of the previous year according to a report published in Reuters.

Centering the profit shortfall, analysts have questioned company's intentions in making huge investments in logistics even for the expense of profits. They have also criticized its planning for buying more assets like trucks and leasing jets. Worries have also been expressed for choosing shippers like United Parcel Sevice Inc. (UPS) and FedEx.

The growing popularity of Prime is one of the factors for driving up shipping costs for the online retailers. Prime promises two day deliveries for millions of online orders and rising shipping cost has appeared as a particular concern to Amazon.

Amazon has opened more warehouses and trying to establish its own delivery system to handle increased orders and speed up delivery. These efforts have engaged current assets narrowing down the profit margin.

But if the 'anything store' remains firm in developing own delivery system, then even the Wall Street investors will suppress their profit thirst temporarily.  Analysts speculate that the online retailer may one day become a logistics player itself, offering storage and delivery of items for other industries. However, others express worries about the costs involved in that endeavor.

Amazon has witnessed a fall in profit during fourth quarter. Fall in Amazon share prices by 13% reflects investors' annoyance centering the profit shortfall. However, analysts have reasoned the profit shortage as an aftermath of increasing fixed assets while decreasing current assets. The ecommerce giant is purchasing trucks, building own warehouses to establish its own delivery systems. So the profit shortfall in fourth quarter may be a planned issue aiming to gain more in the near future.

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