Would a Quarterly Loss Change Your View of Amazon? Read the Details

Amazon’s (AMZN)’s robust $84 billion market cap is a reflection of two things: continuing revenue growth – 41% in 2011 vs. 2010; and the general fact that it’s a new-age business, taking retail to the Internet.

Investors can forgive a lot when a company is changing the world, so to speak, and Amazon has certainly enjoyed the indulgence of shareholders.

Amazon.com Stock Chart by YCharts

But as Amazon’s profit margin shrinks and its PE ratio soars into silly territory, the little details of the business start to matter a lot.

Amazon.com Profit Margin Chart by YCharts

Jeffrey Bezos, CEO, talks a great game and in the just-filed 10-K, we’re told: “We seek to reduce our variable costs per unit and work to leverage our fixed costs.” And we are also assured: “To minimize growth in fixed costs, we seek to improve process efficiencies and maintain a lean culture.” And, of course, when the book you just bought ships immediately, you’d assume they’re doing just that.

But margins aren’t improving, they’re deteriorating sharply. So what gives? (Keep in mind on each of these cost items that revenue rose 41% last year; costs rising faster than that is a bad thing.)

First off, the lean culture now applies to 56,200 employees, a 67% increase over a year earlier, when Amazon employed 33,700. Thus Amazon has plunging revenue per employee.

Net shipping costs (the cost of free and reduced-priced shipping), as YCharts has written about repeatedly, rose 76% to $2.4 billion, thanks to the massively-popular Amazon Prime program.

Everyone knows about Amazon, yet the company felt compelled to boost ad spending and other promotional costs 57% last year to $1.4 billion.

Broad cost categories – fulfillment, marketing, technology and content – each increased as a percentage of sales.

Inventories at year end were $5 billion, a 56% increase over a year earlier.

In giving earnings guidance – Amazon uses a wide range of outcomes – the company has previously said a quarterly loss was among the possibilities. For the first quarter of 2012, Amazon said to expect a sales increase of between 22% and 36%, compared to first-quarter 2011, and to expect operating income of between a negative $200 million and a positive $100 million.

A potential tax bill from the IRS, covering years 2005 forward, of $1.5 billion seemed less a big deal when profits were rolling in. As did the expense of a nice new headquarters in Seattle.

Bezos founded the company and has been CEO since 1996, and he has built an extraordinary service provider. Oddly, for such an operations-intensive company, however, the board of directors Bezos has chosen to advise him has but a single active CEO of a major operating company, Alain Monie of Ingram Micro (IM). The rest are investors, retired executives, an academic and a small-company CEO.

Amazon has plenty of cash sitting around, should its results dip into the red.

Amazon.com Cash and ST Investments Chart by YCharts

And perhaps investors won’t care if it loses money for a while. Salesforce.com’s (CRM) shares are certainly plugging along despite its losses. But unless Bezos has a rabbit to pull out of his hat, the bulging costs are something to worry about.

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