Amazon Slides: Q2 Revenue Up 29% To $12.83B, But Net Income Plunges 96% To $7M, Shares Follow

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Amazon announced its second quarter results today, coming in slightly below estimates with operating cash flow slightly ahead at $3.22 billion year-over-year, compared to $3.21 billion in the year prior. Meanwhile, free cash flow decreased 40 percent to $1.10 billion year-over-year, compared to $1.83 billion the year prior.

The eCommerce giant’s revenue, on the other hand, trended up significantly, increasing 29 percent to $12.83 billion in Q2 — compared with $9.91 billion in the second quarter. A definite bright spot for Amazon. The company was quick to follow by saying that, other than the $272 million it attributes to the “unfavorable exchange rate” through the quarter, net sales “would have grown 32 percent” compared with Q2 2011, the company said.

Both operating income and net income took big hits in the second quarter, with income coming in at $107 million year-over-year in Q2, compared to $201 million in Q2 2011. Again, Amazon attributed this to the unfavorable exchange rates during the quarter, although the impact on net income was less severe, with the company estimating the impact at $8 million.

Net income showed a more pronounced slide, decreasing 96 percent in Q2 to $7 million, or $0.01 per diluted share, compared to net income of $191 million, or $0.41 per diluted share in Q2 2011. Of that 96 percent drop, Amazon estimated that $65 million of the net loss was due to its acquisition and integration of Kiva.

In the company’s earnings statement today, Amazon Founder and CEO Jeff Bezos tried to paint a positive picture of the second quarter earnings, focusing instead on the bargain value of Amazon Prime compared to competitors and the consistency in pricing over the years:

Amazon Prime is now the best bargain in the history of shopping – that is not hyperbole … We successfully launched Prime seven years ago with free unlimited two-day shipping on one million items. The price of annual membership was $79. Since then, Prime selection has grown to 15 million items. We’ve also added 18,000 movies and TV episodes available for unlimited streaming. And we’ve added the Kindle Owners’ Lending Library – borrow 170,000 books for free with no due dates – it even includes all seven Harry Potter books. What hasn’t changed since we launched Prime? The price. It’s still $79.

Amazon continues to invest significant capital in its content, hardware and eCommerce businesses, as evidenced by the acquisition of Kiva, the growth of its lending library, and the expansion of Prime Instant Video catalog to more than 18,000 movies and TV episodes. While the company continues to ramp up content, the spending spree saw Amazon’s operating margins dip to their worst level of the year.

While estimates did vary and sluggishness in Q2 was expected, most had at least slightly more positive outlooks, putting revenue at $12.91 billion and earnings per share at $0.01. Compared to Amazon’s actual Q2 performance of $12.83B in revenue and $0.01 EPS, it’s not a huge miss, but a miss nonetheless.

As a result, while the market closed with Amazon up 2% on the day at $220 per share, after hours trading hasn’t been as kind, with shares dropping 6 percent to $207.17 a share. Naturally, while analysts usually expect the company’s stock to be somewhat volatile after hours, the level of spending and significant miss of operating margins, plus the high valuation of its stock, which is approximately 189 times its future earnings, adds to the worry around Amazon’s Q2 performance.

Again, while a soft performance was expected, it doesn’t help that the company’s forecasts for the third quarter projected an operating loss of between $350 million and $50 million, a significant dip from $79 million in Q3 2011 — which analysts did not expect. Most estimates also had expected Q3 revenues to be around $14.17 billion, but Amazon dropped guidance, projecting revenues between $12.9 and $14.3 billion.

And just to add another thorn in its side, we can compare Amazon’s high-spend, low-profit Q2 with eBay’s recent results, which beat expectations yet again this quarter, based on the strong performance of its Marketplaces, which saw the strongest “organic growth rate in gross merchandise volume, excluding vehicles, since 2006.” eBay’s stock also hit a 52-week high last week.

Amazon is in a low margin game, but it does seem a bit strange that, though the company is now a grisled veteran, why the market continues to value its stock so high when it has been investing to grow now for years. It’s a great company with strong leadership and a visionary CEO, but you have to think that hardware could end up being more of a cost sink and distraction to its business than an area with huge upsides.

For more on Amazon’s Q1 2012 performance, see Leena’s coverage here.