A Call to Amazon Investors Everywhere: Whatever Happened to Earnings?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There's little doubt this article is going to ruffle a few feathers, but try and understand. It's nothing personal, simply a rhetorical question if you will – whatever happened to earnings? Now, Amazon.com (NASDAQ: AMZN) doesn’t quite have the fanatical shareholder community of say, an Apple – but it’s getting pretty darn close. The earning’s call on the 26th appears to have left investors hyper-ventilating with excitement. While there certainly is a lot to like, how in the wide, wide world of stocks is a 35% drop in year-over-year earnings deserving of such a jump in share price?
On the top side – which is clearly the only thing Amazon investors are concerned with – there was a surge in revenue of 34%, to a whopping $13.2 billion for the quarter. No denying it, that’s heady stuff right there. And there was more good news – margins improved to 24% from just under 23% last year and the spending on new warehouses and technology seems to be paying off.
A few other tidbits Amazon lovers grabbed onto was the expansion of the company’s digital library of books, films and related content – a continued shift that moves the company even closer to aggressively competing with the likes of Netflix (NASDAQ: NFLX) and other digital content providers. Amazon’s Prime Instant Video is a big reason Netflix has been taking a beating of late.
Expanding third-party sales, a foray into cloud technologies and expected new Kindle releases have also helped Amazon reach stock prices not seen for 6 months. But what about earnings – let alone earnings growth? The apparently passe, old-school sentiment that stock price should at least somewhat mirror profits (maybe just a little?) was summed up by Barclay Capital’s recently, "The stock is expensive relative to profitability, but with secular tailwinds, Amazon.com's revenue growth may well satisfy investors for multiple quarters to come." Uh, sure.
Does all this mean Amazon will somehow fall back down to earth? Of course not, it’s been flying in the stratosphere for too long to believe that’s going to change. For whatever reason, investors and analysts have determined that even for a well-entrenched industry stalwart they’ll hold onto whatever financial measures they want to support these valuations, and damn the rest of us. For an upstart internet growth firm it's not surprising to seize revenue growth and recognize earnings should follow. But at $101 billion Amazon isn't an upstart growth firm, they just get to pretend they are.
Want to play in the online game with a company or two that actually generates profits? Google (NASDAQ: GOOG) provides all the product and service diversification of an Amazon, makes money hand over fist and, if anything, seems undervalued relative to its peers. Even Ebay and their particularly attractive PayPal division are absolute steals on a comparative basis. Margins and return on equity are nearly three times that of Amazon and it’s trading at just over 16 times that old fashioned earnings multiple thing.
If you’re along for the Amazon ride but are doing so without the emotional connection, here’s a thought - take profits...now! Don’t worry, you’ll have an opportunity to get back in at depressed prices – prior to the next unwarranted run-up.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article. The Motley Fool owns shares of Amazon.com and Google. Motley Fool newsletter services recommend Amazon.com, Google, 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. If you have questions about this post or the Fool’s blog network, click here for information.