Is Amazon’s Free Ride Over?

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Amazon.com founder and CEO Jeff Bezos Photo: David Ryder/Getty Images

For years, every quarter of Amazon earnings has played out in roughly the same way: The company reports a double-digit percentage increase in revenue, coupled with a small-to-medium net loss, and the stock market loves it. Amazon seems to flout basic rules of investor psychology; most stockholders would freak if a company with $10 billion-plus in quarterly revenue failed to turn a profit, but Amazon loyalists trust Jeff Bezos's long-term vision. They assume that in lieu of making profits, Amazon is building new warehouses, developing drones, swallowing the competition, and in all ways becoming an unstoppable empire. Then, they figure, the real moneymaking will begin.

But Amazon's charm may be wearing off.

Yesterday, Amazon reported quarterly revenue of nearly $20 billion, up 23 percent from a year ago, and a loss of $126 million – nothing unusual, in Amazon terms. But instead of celebrating, the market is panicking. Amazon shares are down 11 percent today, shaving $3 billion (or, to put it in real-world terms, 12 Washington Posts) off Jeff Bezos's net worth, and leading many to wonder if, after years of giving the company the benefit of the doubt, the market is finally getting tough with Amazon.

Why are investors only panicking now, after a fairly typical earnings report? A few theories to consider:

1. It's all about guidance. Amazon forecasts it will lose up to $810 million in the next quarter, a much bigger gap than investors were expecting.

2. The phone sucks. Amazon spent untold millions of dollars developing a smartphone that, according to early reviews, is basically terrible. The Fire phone, which goes on sale today, was supposed to ignite Amazon's hardware business, sell more Prime memberships, and compete meaningfully with iOS and Android. Instead, it could be the next Facebook Home — a much-hyped device that sells to nobody and gets quietly buried within a year.

3. Investors don't like Amazon's burgeoning media business. Amazon is spending a huge amount of money developing original content for its streaming video service — $100 million in the next quarter alone. There's no early indication that these efforts won't pay off, but there's no indication that they will, either. Netflix currently owns the market in original streaming content (would you rather have Orange Is the New Black or Annedroids), and while Amazon could catch up, there's a reason media companies don't get the same love from the stock market as tech companies. Media is hard, and investors may wonder if Amazon's in over its head.

4. It's about Amazon Web Services. AWS, Amazon's cloud computing business, is coming under heavy fire from competitors like Google. Prices are being slashed to the bone to attract new customers and keep existing ones, and growth has slowed. AWS has long been touted as Amazon's fastest-growing, most exciting sub-business. But the last few months have shown that cloud computing is basically a commodity now. Customers will go wherever the price is lowest, meaning that Amazon may find it much harder than expected to gain a commanding market share.

5. Investors need more information. For years, Amazon said basically nothing about how it made money. It didn't (and still doesn't) break out numbers about how many Prime subscribers it has, how much AWS is making, or how quickly different segments of its retail business were growing. The black-box approach worked fine, as long as investors were happy with the company's overall growth. But anxiety breeds curiosity. Now Amazon needs to open itself up in greater specificity, so investors can decide which parts of its business justify their continued patience and which don't.

6. The same-day delivery wars are heating up. Amazon's plan for world domination has always included shipping items to you on the day you order it. But now, companies like Google, eBay, and WunWun are also making a play for the on-demand delivery market. These companies have some advantages over Amazon (relationships with local retailers, partnerships with on-demand transportation companies like Uber), and unless Amazon's drones take off soon, it could be in trouble.

7. Regulatory fears. Some have speculated that Amazon's war with Hachette over book sales terms has hurt its public image and increased the chance that regulators will start viewing Amazon's market dominance as an antitrust problem.

Of these seven theories, I put the most stock in 2, 4, and 6, and basically none in 1, 5, and 7. I don't think Amazon investors are actually worried that the company is stretching itself too thin; after all, some percentage of the company's experiments has always failed. And I don't buy the thesis that investors are simply running out of patience for no reason other than the continued passage of time. My hunch is that it's actually fairly simple: Amazon has historically done very well at elbowing competitors out of the market. Now, in areas like cloud computing and same-day delivery — areas that represent where the company wants to go in the future — the competition is stronger, well-funded, and intent on not letting Amazon steamroll them into oblivion. Investors may have assumed that Amazon's battle for market supremacy was nearing its end; now it's clear that it's just heating up.

For Amazon to regain its hypnotic effect on the market, it's going to have to address some of these concerns, and show that it has a battle plan for the next phase of its life. Then, it's time to bare some teeth.