Editor's Choice

Amazon: Still Amazing, But I Don’t Like It

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

With another quarter is in the books for Amazon (NASDAQ: AMZN) and I’m still finding it very difficult to present a legitimate bear case for the stock beyond the typical mentions of valuation. Although as a value investor I would typically stay away from any stock trading at a P/E of over 20 – much less a company that sports a multiple such as Amazon that is big enough to create a nose bleed.

However, Amazon has proven time and time again that it is not your typical company. Therefore it requires a separate set of standards. Although Amazon might remain in the shadows of Wal-Mart (NYSE: WMT) in terms of reported sales, but on the other hand, there aren’t many companies of Amazon’s size that are producing its level of growth.

However, growth has never been an issue for the retail giant. The company has proven time and time again that it can deliver the goods – literally and figuratively. The concern has always been, what has it translated to the bottom line? The recent quarter didn’t do much to answer this question.

The quarter that was

In its most recent quarter, Amazon beat its own revenue estimates of $12.89 billion by reporting revenues of $13.81 billion, which represented a 27% increase in year-over-year. This continued a string of revenue growth, which has averaged 34% over the past five quarters.

On the other hand, Amazon’s challenge continues to be profit growth, which again fell short of analysts’ estimates. The company reported a net loss of $0.60 per share, which was much lower than analysts’ estimates of $0.08 per share.

Investors grew concerned about the company swinging to a loss of $274 million after having earned a profit in the three prior quarters. If there was a silver lining in the disappointing profitability performance it was that Amazon did exceed its own operating income guidance by only netting a loss of $28 million. This was much better than the $50 to $350 million it had projected.

Moving forward

It’s not that all uncommon for companies such as Amazon to struggle with profitability. Although the company is sometimes grouped in with Wal-Mart solely because of the retail side of its business, but Amazon is not operating like the mature company that Wal-Mart is. Amazon has much bigger ambitions than retail.

To that end, I can appreciate that the company is spending to grow. We can get into debates about how much it spends or perhaps whether or not Amazon is spending too much. However, the important question is, what can investors realistically expect from these investments.

For instance, that each of Amazon’s Kindle Fire tablet is sold at a loss speaks to where the company’s head is. These devices are arguably the closest thing to Apple’s (NASDAQ: AAPL) dominant iPad. And although Amazon sells millions of them, the company takes a loss on each one, whereas, the iPad is considered Apple’s highest margin product.

In other words, Amazon’s focus is not where investors think it should be. But on the other hand, from an investment standpoint, 30% growth each quarter from a company its size is also very appealing. It is clear that Amazon is building an infrastructure. The company expects that these investments will ultimately bring in the profits – whether it’s from books, music or movies. But how long will investors wait?

In the meantime, Amazon has to deal with the overhang of taxes as many states are now trying to recapture sales tax revenue. This has been one of the many arguments from the likes of Wal-Mart and other retailers who raise the issue of “fairness” and what is perceived for Amazon to be an unfair advantage.

Again, we can debate logistics and determine what is fair in each state, but it is certainly a sensitive issue and it is one that Amazon can’t afford to lose. After all, for a company that is already dealing with profitability issues, being forced to pay sales tax will certainly eat away at the company’s margins. While that may not impact its revenues, it will certainly force Amazon to think differently about its spending.

Bottom Line

Amazon is an incredible story. What the company has been able to do in terms of growth over the past five years has defied logic and common sense. That said, with expenses soaring to 42% during the quarter, it seems that growth is coming at a huge cost as operating margins also continue to decline. Still the company doesn’t have an answer.

So far investors are saying – so what! That’s all well and good. But at some point, the bottom line will begin to matter. As much as I like Amazon, I wouldn’t want to be holding these shares when that time comes.

rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Apple and Amazon.com. 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!

blog comments powered by Disqus