Prime is the Prime Culprit in Amazon’s Tumble; Just Shy of $1 Billion in Free 4Q Shipping

If only Amazon (AMZN) would use the U.S. Postal Service more – my Amazon boxes always seem to come via United Parcel Service (UPS) – maybe taxpayers wouldn’t have to bail out the post office, after all.

Amazon spent just shy of $1 billion -- $935 million to be precise – to give customers free shipping during the fourth quarter, a 66% increase over a year earlier, and a clear culprit in the company’s plunging net income.

Amazon shares fell late yesterday after the results were released, with many observers mentioning the slightly-lower-than-expected revenue for the fourth quarter; Amazon reported sales of $17.43 billion, a 35% increase, but analysts had been expecting sales of more like $18.3 billion.

Oddly enough, that thinking likely pleases the company – revenue growth driving the stock price – as Jeff Bezos & Co. have made profits a secondary concern, turning to Amazon Prime’s free shipping program to goose sales. With declining profits in recent quarters, the PE ratio had soared above 100.

Amazon.com Net Income TTM Chart by YCharts

The revenue growth has been stupendous, and Amazon is clearly taking huge market share away from the likes of Best Buy (BBY) and Target (TGT).

Amazon.com Revenues TTM Chart by YCharts

But taking market share is costly.

Amazon.com Profit Margin Chart by YCharts

One bright spot for investors crazy enough to care about actual profits: the growth of the expense to fund free shipping declined during the fourth quarter. It was up 66% vs. 82% over the first three quarters or 2011. So, Amazon Prime (and other shipping freebies) cost just less than $2.5 billion last year, or more than 5% of total sales.

Jeff Bailey is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.