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.
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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?
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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.