Amazon’s Profitless Triumph

By Jonathan Berr | October 25, 2013 AAA

Amazon.com (Nasdaq:AMZN) shares are trading near an all-time high even though the company hasn’t earned big profits since around 2010, lost money in 2012 and finished the latest quarter in the red.

Yet, Wall Street is giving the ecommerce giant a thumbs-up because its latest earnings were better than analysts expected. The company’s third quarter loss narrowed to $41 million, or 9 cents per share, versus $274 million, or 60 cents, a year earlier. Revenue surged 24% to $17.1 billion, topping expectations of $18.1 billion.

Amazon’s operating expenses soared 24%to $17.12 billon, as CEO Jeff Bezos ratcheted up spending on video content, technology and new warehouses among other things. Investors would ordinarily raise alarm bells about companies where costs were rising at about the same rate as revenue, particularly given Amazon’s thin 2.9% North American operating margins. But Amazon, as it’s been said many times before, isn’t like most companies, which seems to bother some pundits.

“There is no other company in the world that has such an awful history of profitability, but continues to be rewarded for it so handsomely,” said Sucharita Mulpuru, an analyst at Forrester Research, told Bloomberg News.

Traditional valuation metrics don’t apply to Amazon. It trades at an eye-popping multiple that tops 1,300 and is priced well ahead of its average 52-week price target of $331.22. Raymond James analyst Aaron Kessler, however, raised his price target to $446, which implies a 24% upside potential from current levels. Investors who are willing to tolerate lots of risk should buy the shares. CEO Jeff Bezos has been proving the naysayers wrong for years. There is no reason to think that’s going to stop now.

What moves stocks such as Amazon is “momentum”, a nebulous concept that basically means that people expect the stock to continue to rise when a company’s future appears – at least for now – seems to be limitless. For bulls, there is plenty to like about Amazon.

U.S. e-commerce spending will hit $262 billion this year, an increase of 13.4% from 2012, according to Forrester Research. Web sales are expected to account for 10% of retail sales by 2017 versus 8% in 2012 and 2013. The increases are even bigger overseas, leading to a 20% gain globally. A whopping 1 billion people around the world buy something online every year.

Of course, Amazon has plenty of competitors. As the New York Times recently noted, Wal-Mart (NYSE:WMT) plans to more aggressively take on the company. “For the first time in decades, Wal-Mart, which drove company after company out of business, has a competitor it sounds a little scared of,” the newspaper says. eBay (Nasdaq:EBAY) also is targeting Amazon as it deemphasizes auctions and tries to encourage fixed-price sales.

Amazon reinvented the book business and created the e-reader market with its Kindle device, which it reportedly sells at cost. The company benefits from Amazon Prime, a $79 per month service that enables customers to get two-day shipping and access to video content. Millions more people have signed up for Amazon Prime in the past 90 days, a positive sign ahead of the holiday season. Amazon also expects big things from its cloud computing and data storage business, which one day may outpace its ecommerce operation.

The Bottom Line

Baring any huge mishaps, there appears to be little that can slow the company down. However, the slightest hint of a problem will cause the shares to crater. People willing to accept that sort of risk should buy the stock.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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