Well, you've seen Amazon.com's (Nasdaq: AMZN) second-quarter report, or, if you haven't already, here's a good summary Jeff Fischer wrote for Fool News. And you've seen the stock, though if you haven't, here's a look at the chart for this week. Ouch.

And so you've read the news and maybe followed the stock and now you know that Amazon.com is a large unprofitable retailer with slowing sales growth and significant debt to pay off, and just generally bad mojo on Wall Street. And maybe you own it, but you probably don't. Still, you're wondering what these Fool guys are going to do with this stock that has both made and lost them so much money.

Has the whole e-commerce revolution thingy come to naught? Was this a joke? A waste of time? Was Time's Man of the Year (CEO Jeff Bezos) a good guy or a bad guy? How could Amazon have gotten so high? And how can it now be this low? Can it ever go higher again?

Amazon.com is, to me, the most interesting stock on our public markets, and has been since it showed up in 1997. At various points the company has looked like the greatest star or biggest joke of American business. You have a powerful brand in a relevant sector racking up huge sales growth unprofitably, with the idea that it would eventually "make it up in volume." That's not a frivolous jape, but rather the market's expectation: that as Amazon grew and matured, it would cut costs and wind up a low-margin, high-turnover mega-retailer like Wal-Mart.

And lookie there: the marketing costs are down 18% this quarter from the same quarter last year. The fulfillment costs? Down 2% this quarter from last year. So the company just grew its quarterly sales 16% (from $578 million to $668 million) with 18% less marketing! In a recessionary environment. And despite doing $90 million more in sales, it lowered its overall fullfillment costs, too.

So Amazon must be fulfilling its promise, right? Even the most optimistic would say, "Not exactly." That's because plans for, or ability to achieve, profitability have been consistently pushed back over time. And now the market has ironically fastened on Amazon's top-line growth again, after insisting for lo these many months that Bezos & Co. focus on the bottom line. You can't win for losin'.

With so many negatives, including a daring and perhaps tragic decision to borrow $2 billion rather than raise the money in equity, and so much negative sentiment, one wonders how Amazon would be worth anything at all. Why is the stock trading for anything more than a few pennies? That 25% hit the shares took on Tuesday was lenient, some will think. And yet, despite the sudden interest we've seen in sales growth, cash flow from operations is more interesting to me. In its unaudited SEC statement just released, Amazon writes, "Net cash provided by operating activities was $2 million for the three months ended June 30." So, it was positive. No headlines about that.

That's right, take a look at the cash flow statement and you'll see that Amazon entered the quarter with $463 million in cash and equivalents. Make adjustments for net losses including the debt interest owed, etc., and you'll find that net cash flow from operations actually stacked about $2.4 million on top of that $463 million. And the cash flow from operations isn't just because Amazon is holding off on its accounts payable. Its accounts payable, at $257 million, is actually below last year's $286 million.

Which I guess is a primary reason why I'm holding my Amazon. Sentiment about doing that couldn't be more negative, which I guess is another reason why I'm holding my Amazon. "This is no longer a growth story," says Hambrecht analyst Kristine Koerber, but Amazon's vastly lowered expectations equate to double-digit sales growth year over year. Last I checked, 13% annual growth was growth. And a pretty good kind of growth, because it's growth during recession. Of course Amazon's not throwing up triple-figure growth anymore! This is a company that will finish 2001 with over $3 billion in sales. Your growth rate slows as your numbers rise. Slows, but it hasn't stopped. (Where and how are YOU going to do your holiday shopping this year?)

Maybe some of this thinking suggests why AOL Time Warner (NYSE: AOL) just invested $100 million in Amazon this week. What do you make of that? Is AOL stupid? Perhaps they're so large and oblivious these days that they just throw around $100 million investments any random place. Or do you think they are investing that money expecting a return? Maybe they're just really nice guys and feeling charitable.

Please note, I don't expect to add my money anytime soon to this position. We have never added any money to Amazon since our original investment at $3.18 on September 9, 1997. At the same time, I'll hold onto shares in a company with a strong brand and 8.5 million customers (over the last 12 months) that is struggling to go profitable during what is still an early stage in its history. And I say AOL Time Warner is smart money. Let's watch together and find out.

David Gardner, July 25, 2001

David Gardner is co-founder of The Motley Fool, and owns shares of both Amazon.com and AOL Time Warner. The Motley Fool has a full disclosure policy.