Amazon has not been an investors’ darling of late, and the guessing game over the exact game plan of its founder and CEO Jeff Bezos just got more confounding. The company posted a worse-than-expected $437 million loss for the last quarter. To boot, the world’s biggest online retailer also said it expects weak revenue growth in the 2014 holiday season. Amazon projected a 7%-18% revenue growth for the current quarter compared to the 20% it achieved in earlier years. Consequently, the company’s share price dropped more than 8% after the announcement, and Monday’s close of $290 is far off from the year’s high of $407 in January.

Amazon’s undeniable strength is in the deeply loyal customer base it has built over the years, even as everybody is still waiting for it to reveal plans to monetize that. “Bezos has been on message, completely and consistently for 20 years,” said Peter Fader, Wharton marketing professor and co-director of the Wharton Customer Analytics Initiative. “He’s been building for the future, figuring out who those valuable customers are and surrounding them with a variety of products and services, some of which Amazon doesn’t make any money on, but which make the customer much more valuable to Amazon.”

Wharton management professor Daniel Raff was skeptical of how Amazon’s investments in both its retailing operations and the company’s web services business, which offers remote computing, will play out. “It’s not clear that at the end of the day, all of the money they are pouring into those two types of enterprises will leave them with a dominant position [in those market segments],” he said.

Fader and Raff discussed Amazon’s options on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Bulls vs. Bears

On Wall Street, “bulls want to see this as a blip,” said Raff, referring to Amazon’s disappointing third-quarter results. “They want to see the company as very firmly investing for a long-run competitive position, and making capital investments or whatever is required to assure a dominant position in the future. They also tend to be rather vague as to how that position is going to be established— who the competitors actually are and so forth.”

“The value of the stickiness of Amazon’s customers doesn’t show on the balance sheet.” –Peter Fader

By contrast, “the bears have specificity on their side,” Raff noted. According to Raff, the bears contend that the markets are changing underneath Amazon in its traditional media business. Their argument is that more and more of that media business is in digital products, which can be accessed via downloading. Here, Amazon faces “very large and very sophisticated” competitors such as Apple, Google and Netflix, he said. For a company that built its initial fortunes as a books retailer, that market is now tougher to operate in. “There is a whole lot more competition than in the days when Amazon had raised capital very cheaply and was going up against thinly capitalized independent bookstores,” Raff pointed out. Of two large retail bookstore chains, only Barnes & Noble survives, while Borders filed for bankruptcy and closed down in late 2011.

Raff said another big challenge for Amazon would be the heavy investments it needs to make in order to stay competitive in the web services business. He noted that the company started growing that venture in the years after the tech slump of the late 1990s. “They put a lot of resources into books, music and video, but the other big thing they did is to invest like mad in this business,” he pointed out. “I strongly suspect it is a huge piece of their business and where their cash is going.”

Amazon’s much-touted “free cash flow” numbers are also suspect, according to Raff. “Some of the statistics [Amazon quotes] are calculated in somewhat puzzling ways,” he said. Amazon has said that its free cash flow has grown in the 12 months preceding September 2014, from $388 million to $1.1 billion. However, that included big chunks of depreciation and stock-based compensation, according to a report by Akshay Kaul in Seeking “Neither of these fit very comfortably within a definition of free cash flow — certainly, neither is available for distribution to shareholders, as they are both intrinsic costs of carrying on the business, and do not represent distributable cash,” Kaul wrote.

Not Much Heat with ‘Fire’

Amazon is also smarting from the disastrous reception for its Fire smartphone. But Fader sensed a longer-term objective at Amazon with the Fire phone. “Amazon isn’t afraid to cannibalize itself just to create a little bit more customer lock-in and to push some competitors out of the way,” he said. “One could argue that the whole book business has been a failure for Amazon because [the company] hasn’t made any money on it. But it has helped them establish a real position of strength that they can leverage in other ways.”

“I think [Amazon is] going to expand its footprint and its tentacles into us even deeper.” –Peter Fader

Amazon this week introduced the $39 Fire TV Stick, which plugs into HD TVs to deliver streaming content from Amazon Instant Video and elsewhere. But other uncertainties loom in Amazon’s traditional books retailing business, where it has locked horns with publishers over sharing margins. Amazon has a contractual dispute with Hachette Book Group of France over the online retail pricing of its books and how it affects their respective shares of margins. In the fallout of that dispute, Amazon has been negotiating contracts with other big publishers, including one with Simon & Schuster that was recently sorted out, Raff noted. He added that content is getting more expensive and therefore eating into Amazon’s profit margins.

With the growth of online retailing of books, the stakes are very high for Amazon and book publishers. Amazon has a 67% share of the market for e-books and 64% of printed books sold online, according to a May 28 story in Publishers Weekly. Amazon is “a very large and very deep-pocketed organization, and the major commercial publishers make a lot of their sales through it,” Raff observed in a Knowledge at Wharton article on Amazon’s troubles with Hachette. “No wonder these publishers are worried. It poses a threat to them in a way your old Main Street bookstore never could.”

More immediately, Raff wondered if and how Amazon will be affected by retailer Target’s move to offer online shoppers free shipping in the current holiday season. He noted that a lot of Amazon shipments are not just books, but include other goods where it could face competition from others offering similar free shipping deals. Fader was not worried for Amazon, however. For sure, there may be some shoppers “on the margin” who may go with Target and others offering free shipping. “But there are so many people with their finger on the button with Amazon, and they’re just going to click, click, click [and] Christmas shopping is done,” Fader said. “They don’t want to walk into a store at all.”

Amazon articulates the challenges it faces in its regulatory filing with the latest quarterly results. “Our businesses are rapidly evolving and intensely competitive, and we have many competitors in different industries, including retail, e-commerce services, digital content and electronic devices, and web and infrastructure computing services.” The company adds that some of its competitors have greater resources, longer histories, more customers and/or greater brand recognition. “They may secure better terms from vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing,” the filing said.

“The bears [on Amazon] have specificity on their side.” –Daniel Raff

Valuing Sticky Customers

Fader agreed with Raff that it is hard for those who are bullish on Amazon to articulate their case more specifically than they have so far. “It’s not really Amazon’s fault; it’s about how we value companies,” he said. “We tend to look at the products; we tend not to look at the value of customers.”He added that Amazon is “creating some incredibly valuable customers”who make up its large sales volumes ($60 billion in the first nine months of this year), and are locked in with their loyalties.

“The value of that stickiness doesn’t show on the balance sheet,” Fader noted. “Bezos says, ‘Trust me, trust me, trust me.’ I think he’s right.” He criticized those who try to use standard Wall Street metrics “to judge a company that is really building some customer value and not product value.” Raff agreed with Fader’s reasoning, but with a caveat. “You have to look closely at the composition of the business of any particular firm to understand exactly how much purchase that sort of analysis has,” he said.

Fader recalled that he was in fact an “early skeptic” of Amazon because of its unconventional ways. “But over 20 years, I’ve learned that they’re actually embracing a very different kind of strategy and doing it superbly well even if quarterly numbers don’t reflect it.” The company’s move to open a retail store in Manhattan and other similar bricks-and-mortar investments are “brilliant” because they will bring the company “closer to customers,” he added.

“They have such an adored name — customers just love what Amazon means to them even if publishers and other intermediaries don’t,” said Fader. “I think they are going to expand their footprint and their tentacles into us even deeper.”