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. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
RELATED FAQS
  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 >>
COMPANIES IN THIS ARTICLE
Trading Center