Amazon: making waves as flows slow Amazon's management is playing a game of chicken with its investors. It has systematically taken profits out of the business, opting instead for investment, low prices and market share - betting that investors, who usually insist on valuing businesses by their earnings, will pay up for sales growth instead. Before Tuesday's results, operating income had been falling steadily for a year. In the September quarter, operating margin fell below 1 per cent, down from peaks north of 5 per cent, and free cash flow fell by half, even as sales screamed. There has been some pushback: the shares are down 15 per cent since the third-quarter results announcement. Overall, though, the management's bet has played out. The stock still trades at a rich price by any measure. Investors may finally blink following the fourth-quarter results. Sales growth, while still strong, is slowing. Revenues grew 35 per cent but were up 44 per cent the previous quarter, and guidance for the next quarter suggests the slowing trend could continue. Margins rebounded a bit but profit targets left open the possibility that they could fall again. The tricky problem is that internet retailing of physical and digital goods has never before been practised on Amazon's scale. So it is hard to project what normalised margins might be and how customers will respond when Amazon, finally content with its market share, stops selling crucial items (such as its Kindle ereaders and tablets) at lossmaking prices. If sales growth is in fact decelerating, these uncertainties suddenly become much more important. There will always be those who believe that Amazon is destined for vast profits simply by virtue of being the leader in a growing market. But investors without a reasonably clear view of the future should insist on seeing earnings in the present. Email the Lex team in confidence at lex@ft.com