Should You Care About Margins?
Earnings season always seems to bring its share of surprises
and big moves in stocks. Just ask Amazon (AMZN).
The online retail giants shares took a huge hit after the company announced disappointing earnings.
Investors arent happy with the companys shrinking margins. And theyre concerned over a potential operating loss in the fourth quarter. Thats why the stock dropped a hefty 12% in just one day.
But does AMZN deserve to be abandoned just because of shrinking margins? And more importantly, should you care about margins when researching penny stocks?
Lets start with AMZN
By now, most of you have probably heard about Amazons latest product Kindle Fire. Its the product theyre using to vault into the red hot tablet PC market. Basically, theyll be taking Apple (AAPL) and the iPad head on.
So far so good.
All indications are Kindle Fire is selling like hotcakes. Supposedly, the company sold 100,000 units the first day it was available and has averaged 25,000 per day since then. They could easily sell several million units by the end of the year.
Heres the problem
Amazon is selling Kindle Fire at a loss.
Unlike Apple, Amazon doesnt try to profit from their device sales. Instead, theyre focusing on selling content. That is, theyre sticking to their core business of selling books, music, movies, games, and other digital media goods.
Of course, theres going to be a lag between when Kindle Fires are sold and when content sales ramp up. Its only natural. Not to mention, the first Kindle Fires dont even start shipping to customers until November 15th.
Frankly, I dont understand why investors are getting spooked. Amazon will easily make back their loss on the device (a mere $5 or $6 per device) in short order. And I have no doubts theyll sell a lot more digital content because of the devices.
Heres the key
Growing companies (and despite Amazons size, its still a growth company) should be focused on revenue growth. They dont have to worry about margins until their sales growth tapers off.
And just like AMZN, most penny stocks are growth companies.
As a penny stock investor, you should emphasize revenue growth significantly more than margin levels. Smaller companies need to grab market share above all else. Theyll have plenty of time to cut costs, and focus on the bottom line, once theyre an established player in their industry.
Now, Im not suggesting you should completely ignore margins. However for growing companies, large or small, there are a lot more important metrics to care about.
Yours in profit,
Gordon Lewis
Category: Retail Stocks, Technology Stocks
