Although Amazon (Nasdaq:AMZN) is not close to being my favorite internet stock, it's hard for me not to admire the company on multiple levels. Not unlike, Google (Nasdaq: GOOG) Amazon isn't afraid to walk and chew bubblegum at the same time, and the company seems unafraid of flouting Wall Street's obsession over short-term growth by investing in multiple projects that likely won't produce meaningful margins for many years. While there's still a worry that investors will lose faith in the company's ability to generate strong margins and cash flows at some later date (and revise their opinion on “fair” multiples accordingly), Amazon seems focused on remaining a disruptive force in multiple markets.
Half-Full? Half-Empty? You Decide...
I suspect the reactions to Amazon's quarter will run along familiar lines, as there was plenty of fodder for both the bulls and bears. Bears can point to slowing unit growth and below-expectation revenue (though barely in both cases), ongoing weakness in Europe, and declines in pro-forma margins. Bulls, though, can point to strong overall growth, improving gross margins, and good progress with multiple growth ventures.

SEE: 5 Earnings Season Investing Tips
Revenue rose more than 22%, with North American Media up 16% and North American EGM up 31%. International was not nearly so strong, with Media revenue down 1% (and well below expectations) and EGM up 22% (also below expectations). “Other” revenue, which includes Amazon Web Services, jumped 61% but is still only about 5% of revenue. 
Margins were a mixed bag once again. The gross margin improved two and a half points from the year-ago level, with AWS and increased third-party sales helping. Operating income was down 26%, though, and operating margins are still sub-1%. An alternative profitability metric, CSOI, saw nearly 14% growth (above the high end of management guidance) and though the margin slipped 20bp from last year, it was still above expectations.
Not Backing Off Groceries
It seems like bulls and bears will argue over anything and everything Amazon does, and the company's growing grocery delivery service (AmazonFresh) is the latest case in point. The company has expanded this service (which it has been trialing in Seattle for several years now) into LA, with a $299/year price tag. Perhaps 20 or more markets could be added in 2014, and both Google and eBay (Nasdaq: EBAY) are reportedly trialing similar services.
Prime And AWS Still In The Investment Phase
With Amazon still lagging Netflix (Nasdaq: NFLX) in terms of content, content acquisition is an ongoing priority for Amazon to grow the Amazon Prime business. Recent deals with the likes of Viacom (NYSE: VIA) help in that regard, and Amazon is pursuing a similar route with proprietary content development.
On the AWS side, tech analysts continue to buzz over the disruption that Amazon could bring to the IT space, particularly in hardware. While I don't doubt that IaaS and PaaS could be significant growth opportunities, I'm still unsure about the extent to which services levels will be predicated upon capital investment. Likewise, assuming that large would-be players like IBM (NYSE:IBM), Google, and Microsoft (Nasdaq: MSFT) commit similar levels of capital, to what extent will competitive differentiation come down to pricing?
SEE: A Primer On Investing In The Tech Industry

The Bottom Line
It's certainly not unheard of for Amazon shares to go through stretches of underperformance, but that's not the case right now. Instead, Amazon shares seem pretty richly valued as is, with a pretty meaningful amount of future profitability/cash flow improvement already baked into the shares. Accordingly, eBay and Google look like incrementally better ideas today for new money.

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  7. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  8. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  9. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  10. Investing Basics

    How to Diversify with International Stocks

    Diversifying with international stocks can benefit most portfolios, but beware of country risk.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!