Amazon Goes Head Over Heels

There's no denying which end of the income statement Amazon.com (Nasdaq: AMZN  ) is gunning for in recent quarters. It wants to grow its top line. If margins suffer as Amazon tries to outfit more bibliophiles with e-readers and make its digital streams stickier by including them at no additional cost, so be it.

Last night delivered more of the same. Earnings fell 8% to $0.41 a share, even though net sales soared 51% to $9.9 billion. Analysts figured that the leading online retailer would earn just $0.35 a share on $9.4 billion in net sales. In other words, investors are actually applauding the margin crunch, because Amazon landed well ahead of the prognosticators on both fronts.

The margin contraction parade will continue. Amazon's guidance for the current quarter calls for operating income to fall by 37% to 93% -- yes, 93% -- with net sales targeted to grow by 36% to 47%.

What can cause Amazon's profitability to continue to dwindle? Could it be the rumored tablet introduction and Kindle updates? Could it be Amazon's heightened push to challenge Netflix (Nasdaq: NFLX  ) in digital streaming? It won't come cheap, as it probably found out when it recently added 2,000 titles from CBS (NYSE: CBS  ) to its Prime streaming offering. It also won't be alone, as Wal-Mart (NYSE: WMT  ) is finally integrating its VUDU digital video rental and purchase offering to walmart.com.

A few years ago, this is the kind of quarter that would have crushed the stock. Instead, the stock barreled toward fresh all-time highs last night. Investors finally see the big picture at Amazon, and it's one that values net sales and stickiness over the bottom-line growth that may be absent today but will catch up quickly in the future if Amazon's blueprint holds up.

Is Amazon a good buy here, or is it too expensive? Share your thoughts in the comment box below.

Motley Fool newsletter services have recommended buying shares of Netflix and Amazon.com. Motley Fool newsletter services have recommended buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.  

Longtime Fool contributor Rick Munarriz has been shopping online since the early 1990s. He does not own shares in any of the stocks in this article, except for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 27, 2011, at 5:43 PM, xetn wrote:

    Who knows if the price of AMZN is too high, compared to NFLX? Maybe NFLX is too high? Lets see, AMZN has hundreds of streams of income, from virtually every sector you can think of and thousands (a few less now that California has decided to tax them) marketers selling for them. What does NFLX have; movies? Hmmm.

    And, compared to WMT, no brick/mortar expenses, not much labor expense (comparatively speaking) and can see about anywhere there is an internet connection.

    Perhaps AMZN will buy out NFLX and CBS, nay the government wouldn't go for it.

  • Report this Comment On July 28, 2011, at 9:45 AM, mikecart1 wrote:

    Amazon is following Wal-Mart perfectly. Soon Amazon will drop to the $100-150 range and stay there for the next 10 years. Welcome to the bigtime Amazon! You did what no company wants to do. Increase sales and decrease revenue. Way to go Bezos!!!! Your education has done the company proud.

  • Report this Comment On July 28, 2011, at 10:01 AM, Sparticus501 wrote:

    It is time for the Motley Fool people to give AMZN a 3 star CAPS rating. The company is doing everything right, NFLX is making some dumb moves by increasing their fees. The AMZN California ballot question will likely pass, getting otehr states to think twice before passing an internet tax. Shoppers go into Best Buy, check out a product, then buy the electronic it on AMZN. The question is what does AMZN not sell? They are no longer just an online bookstore and have an outstanding long-term growth plan.

  • Report this Comment On July 28, 2011, at 11:16 AM, David369 wrote:

    I wonder what value the CAPs ratings have? AMZN, NFLX, and other historically fantastic growth stocks are only given 2 stars. Apple only gets 3, COST and GE only have 4, WMT only has 3. Maybe I should look at what stocks are given 1 or 2 stars and consider investing in them. I could be a contrarian star investor, maybe start a Foolish newsletter based on it...."Rising Stars" or something.

  • Report this Comment On July 28, 2011, at 1:31 PM, mikecart1 wrote:

    Sparticus501,

    It is 2 stars because historically AMZN has been a joke. Don't let the past 2-3 years fool you. They are headed on the same path Wal-Mart did and is. Soon they will have historically ridiculously high sales and just barely beat even.

    David369,

    You do that and come back when you lose all your money. The star system works. Defy it and it will work against you. Beware!

  • Report this Comment On July 29, 2011, at 4:23 PM, ldkoehler wrote:

    Amazon's ROIC of 28% (putting it in the 95th percentile of Russell 3000 companies) means that Amazon has some room to sacrifice margins for revenue growth and market share.

    Amazon is probably the only company well positioned to compete with Apple in the eco-system business. They need more products to take advantage of that system, and they may need to sacrifice margins to compete in the field.

    The problem for shareholders is that expectations for Amazon are already rather high, assuming large revenue growth while maintaining current margins. Even growing revenues at 30% per year and maintaining margins, AMZN's stock price has 8 years of future profits baked in.

    I'm neutral on AMZN.

    For more information about quantifying market expectations, see:

    http://blog.newconstructs.com/2010/05/19/how-to-make-money-p...

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