Will The Mighty Amazon Deliver?

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

 Amazon (NASDAQ: AMZN) has always been about the consumer, a focus religiously pursued by the company's transformational leader, Jeff Bezos. However, that long-term emphasis often leads the company to miss out on the short-term earnings focus of the Street.

Sky High Valuation....Really?

Long-term believers of the company have been rewarded very handsomely. Amazon has come up with numerous game-changing innovations and holds market-leading positions in a number of categories. But unfortunately, Amazon hasn't come up with sizable profits in the process.

There's a question surrounding Amazon: How long can it ride the momentum without falling off the cliff? Its sky-high earnings multiple of more than 3200 makes many level-headed investors bearish about the stock. But as is often the case with Amazon, there is more to the company, than what meets the eye.

The trailing-12-month P/E has gone through the roof because of losses stemming from two Amazon investments, Kiva Systems and LivingSocial. They hurt Amazon's bottom line by a combined $234 million in Q2 and Q3 of 2012. Add back those one-time losses, and the P/E multiple comes spiraling down to around 460.

A few notable analysts have upgraded the stock to BUY, which shouldn't come as a surprise at all. Non-recurring one time losses should be normalized to paint an accurate picture of a company. And more importantly, its core businesses have been successfully widening their respective moats. Given the outsized growth opportunity at hand for Amazon, the company deserves a valuation premium compared to the overall market. 

Market Share Focus

Amazon has taken the traditional 'razor-and-blade' business model used by many companies to a whole new level with its very own "gain market share and then make money from your wares" model. Amazon's eCommerce platform has almost certainly performed phenomenally over the holiday season, and will likely surpass previous revenue records without much doubt. 

The firm keeps on eating away the market share of brick-and-mortar competitors left and right. Amazon's disruptive model has even sent many firms out of business. Amazon is single-handedly responsible for the woes of Barnes & Noble (NYSE: BKS), which is shutting down one-third of its retail outlets to deal with big losses and changing business conditions. Thanks to the onslaught of Amazon's Kindle line of readers and tablets, the Nook from Barnes & Noble hasn't been performing as expected, either. 

Business Segments Offer Compelling Value 

Amazon's cloud computing service has been growing extremely fast. It offers small and large businesses the pay-as-you-go model, and doesn’t tie customers up with expensive long-term contracts. And it has to be a very good service, since one of its biggest rivals in the Internet TV space, Netflix (NASDAQ: NFLX) is a big customer of its cloud infrastructure. The large-scale, low-cost capabilities of Amazon’s cloud are increasingly bringing in more small businesses, startups, and even government agencies. 

Amazon’s new line of Kindles are rapidly eyeing Apple's (NASDAQ: AAPL) market share of tablets. To supplement the Kindle's content, it is constantly adding to its entertainment library with newer movies, TV shows, music, and more to lock horns with the iTunes platform. Amazon is increasingly offering a differentiated service relative to its competitors, whether it’s offering audiobooks, providing free shipping on its e-commerce platform, or producing original content exclusively available only via Amazon's digital media. 

Amazon is in midst of producing original content to keep up with streaming powerhouse Netflix and will provide consumers more incentive to pick up an Amazon Prime subscription. The original content also offers an added bait to buy a Kindle device as opposed to buying an iPad Mini or a Nexus tablet.

Q4 Guidance and Consensus

Management's guidance range for revenues came in at $20.25 billion -$22.75 billion. And the company's guidance range for operating profit stood at a loss of $490 million to an operating income of $310 million. Given the wide range of guidance, a lot of volatility can be expected. The sell-side estimates have a EPS consensus of $0.28, on revenues of $22.26 billion.

With the relatively rich valuation of Amazon, if the top and bottom line numbers fall short by a small margin, the stock can take a hit. The low single digit profit margins and declining year-over-year free cash flow of Amazon doesn’t help, either. 

The Foolish Takeaway

Amazon's gigantic e-commerce platform and cloud computing services have huge value propositions for consumers and businesses alike. Its digital media ecosystem, powered by Kindle sales, will only gain prominence down the road. The rational investor can calmly ignore the short-term earnings miss or hit, and focus on the company's long-term prospects.

ishfaque has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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