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Amazon Earnings Dent AMZN Stock, but Can’t Stop the Machine

Despite disappointing earnings, Amazon still looks good


Amazon (AMZN) earnings came out Thursday afternoon after the close of trading. Its second-quarter loss hit $126 million on a 23% increase in revenue.

amazon-amznInvestors predictably have reacted unfavorably to the news, knocking AMZN stock for a double-digit decline. AMZN stock is now down 20% in 2014, trailing the S&P 500 by a whopping 27 percentage points.

Should investors be worried about the latest red ink, or is this just another chapter in Jeff Bezos’ grand plan? Let’s take a closer look at the details.

Sorting Out the Numbers

It’s human nature for investors to focus on the bottom line. Losing money is never a good feeling, and when it leads to a serious decline in AMZN stock you have every right to be concerned about your investment. Amazon finished 2013 with an operating profit of $745 million and free cash flow of $2 billion. This year, it projects as much as $810 million in operating losses in Q3 — it looks as though it could end up with a full-year operating loss for the first time since 2001. But back then, it had annual revenues of just $3.1 billion; today, revenues are north of $90 billion and expected to approach $110 billion by the end of 2015.

The million-dollar question is how long AMZN stock can remain afloat if the top and bottom lines keep going in opposite directions.

If I knew the answer to this I wouldn’t be writing this article but rather lying on a beach somewhere living off my gains trading AMZN stock. But seriously, the longer this question remains a mystery, the harder it’s going to be for Jeff Bezos to avoid investors’ call for it to generate greater profits.

Only a Matter of Time

John McDuling wrote an interesting blurb in Quartz July 22 that reckons Amazon Prime is the “moat” that will get AMZN over the top opening the profit gusher that investors have been waiting on for more than a decade.

The premise is that Prime customers spend a lot more (about $1,000 over the lifetime doing business with Amazon) than non-Prime members do, making them far more valuable to its bottom line. Deutsche Bank analyst Ross Sandler projects that the company could have 100 million Prime customers by 2020, worth an estimated $70 billion in future revenue. The best part about these customers is that it costs Amazon very little to acquire them.

As McDuling points out at the end of his article, the Prime customers are valuable enough to justify its $147 billion market cap.

The Good News About Amazon Earnings

The number that jumps out for me is free cash flow for the trailing 12 months ended June 30. Despite capital expenditures of $4.3 billion, it managed to generate free cash flow of $1 billion — 292% higher than in the trailing 12 months in 2013. Obviously, the guidance provided for Q3 suggests Amazon won’t be able to maintain its current level of cash generation, but it still ought to be able to grow free cash flow in 2014. As long as it keeps doing this, I’m not too concerned about its short-term profit picture.

The second item that catches my eye is its “other” revenue, which includes revenues from its Amazon Web Services segment. For the first six months in 2014, other revenue increased 46% year-over-year to $2.5 billion. Jeff Bezos has said in the past that this segment will someday have revenues that surpass those of its retail business. That day is a long way in the future, given the size of its retail business, but if AWS keeps growing at its current clip it’s not unreasonable to expect that it could happen within a decade or two.

AMZN Stock — Bottom Line

Personally, I view the latest Amazon earnings as the glass half-full. I believe it’s business as usual at the world’s biggest online retailer, and AMZN stock is one of my top top five picks for the next 20 years. I don’t think Jeff Bezos is done; rather, I think he’s just getting started.

Since AMZN stock first breached $300 in July 2013, it has dipped below that line on just two occasions. In the weeks ahead, I’d be buying should it fall below $300 for a third time, which I suspect it will as investors penalize the company for delivering such huge losses.

If you own AMZN stock I’d use this as an opportunity to pick up some more. If you’re a first-time buyer, you’ll want to consider whether you can stomach investing in a company that generates so much revenue and so little profit. If you can, it’s an excellent time to be buying.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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