Breakout

Amazon Earnings Send Stock Soaring: 3 Reasons to Stick With It

Jeff Macke
Breakout

Amazon (AMZN) stock is screaming higher today after reporting earnings last night. The company earned 28 cents versus estimates of 7 cents, and revenues for the quarter were $13.8 billion, when analysts were looking for $12.9 billion. The results led to a slew of upgrades, most notably from Goldman Sachs (GS), which raised Amazon from neutral to buy, with a target of $300 per share.

Bears find the enthusiasm for Amazon baffling. Earnings actually fell year-over-year, Amazon's margins are miniscule, and the stock trades at 180x trailing earnings. Those three facts alone would normally scream "sell."

Under normal circumstances, a stock with Amazon's metrics should be avoided. But there are three things the bears don't understand about Amazon. In the attached video I discuss the bullish case with Jared Dillian, author of the DailyDirtNap.com newsletter. (Note: I own shares of Amazon.)

Amazon Founder & CEO Jeff Bezos

Bezos reinvented retailing. Amazon all but killed Borders, Barnes & Noble (BKS), and scores of smaller competitors. Target (TGT) and Wal-Mart (WMT) once thought they would destroy Amazon by tacking "dot-com" to the end of their names. Obviously they were mistaken.

"Bezos has been very successful at doing what he's doing," concedes Dillian. "But he's managed to fool a lot of people for a very long time with regard to the valuation of the stock."

If it weren't for Steve Jobs, Bezos would be the best CEO of the last 15 years—not in terms of stock price, but execution.

Amazon Share Price: Not as Expensive as it Looks

Amazon's margins are horrible; 1.5% on the bottom line would be bad for a grocery store. The trailing P/E ration of 180 looks like a misprint from a bygone era.

The gold standard in discount retail is Walmart, with about 6% margins and a P/E of 13x. Even if Amazon could match Walmart's margins, the stock would still be nearly 50x earnings.

Dillian thinks it's long overdue that either Amazon puts up some earnings or moves down as a stock. Drawing a parallel to dot-coms, Dillan notes it's been 12 years since Amazon's peer group blew up, and the company is still earning virtually nothing.

Fair point, but stocks "priced to grow" aren't expensive until the growth stops. From 2009 to 2011 Amazon doubled revenues. Earnings stunk, and gross margins fell from 1.1% to 1.4$, largely due to product shift (more hardware sales investment).

With a demonstrably smart company, it's best to take the revenue and wait for the margins. Shorting because "it's expensive" is pure trading death.

The Amazon.com Brand Power

Brand in retail is simple: give the customer what they expect while doing it efficiently. Every Walmart should be the same, as is the case at Target, McDonald's (MCD), and Tiffany's (TIF).

Amazon customers want a good price and exceptional customer service, albeit in a hands-off way. Amazon delivers what is expected with more consistency than any other merchant in the world—by far.

The Amazon brand adds value to anything the company sells, and they sell just about everything on the planet.

Dillian says much the same thing, but his beef still comes back to the bottom line. With Amazon, "The consumer definitely wins, and Amazon's stock price definitely earns, but I want to see earnings at the end."

Dillian isn't one of them, but people have been shorting Amazon based on profits since it went public. It's been a bumpy ride, but the stock is up over 12,700% in 15 years and more than 36% Compound Annual Growth.

The shorts don't even know what keeps hitting them.

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