Falling: Buying Opportunity or Time to Panic? crashed by almost 10% after reporting earnings, and the dip could present a buying opportunity for strategic investors.

Andrés Cardenal
Andrés Cardenal
Apr 28, 2014 at 10:09AM
Consumer Goods

Source: (NASDAQ:AMZN) fell by almost 10% on Friday after investors reacted with pessimism -- or even fear -- to the company's latest earnings report. However, Amazon is still generating remarkable growth rates for a company of its size, while materially outgrowing both e-commerce competitors such as eBay (NASDAQ:EBAY) and brick-and-mortar retailers like Wal-Mart (NYSE:WMT) by a considerable margin.

Is the recent sell-off in Amazon a buying opportunity for investors, or is it time to run away from the company?

The numbers
Net sales grew 23%, to $19.74 billion, in the first quarter of 2014, compared with $16.07 billion in the same quarter of the prior year. This was above analysts' expectations of $19.4 billion for the quarter, and quite an impressive figure for a company of Amazon's size. Active customer accounts increased by 7 million to more than 244 million, active seller accounts were above 2 million, and third-party units represented 40% of total paid units in the quarter.

While product sales increased 18.3% to $15.7 billion, services sales grew at a considerably higher rate of 44% to $4 billion during the quarter. Services represented 20.3% of sales versus 17.3% of revenues in the year-ago quarter.

It's important to notice that services typically carry higher margins than product sales, so this bodes well for Amazon when it comes to gross margin. In fact, gross margin during the quarter increased to 28% of revenue versus 26.6% in the first quarter of 2013.

Amazon continues investing aggressively for growth, so operating margin remains at razor-thin levels, near 0.7% of revenues. On the other hand, operating cash flows for the trailing-12-month period increased by a strong 26% to $5.35 billion. Earnings per share came in at $0.24 during the quarter, roughly in line with Wall Street estimates.

Amazon is raising the price of its Prime membership, an important decision that could be very positive in terms of margins, but also a considerable risk, because Amazon Prime is such an important piece of the puzzle for the company when it comes to customer loyalty and competitive strengths.

Fortunately for investors, management is quite confident based on the initial reaction from customers.

In terms of Prime, it's early, but we are encouraged with what we see so far. Just over the last several weeks, our Prime subscribers continue to grow week over week. New trials, the adoption of new trials again post the increase are growing very nicely.

Beating the competition
It's hard to make fair comparisons with Amazon, as the online retailer is one of a kind. However, looking at competitors like eBay and Wal-Mart could provide some context when it comes to Amazon and its performance against both online and brick-and-mortar rivals.

eBay is scheduled to report earnings for the first quarter of 2014 on Monday, and the announcement will provide important information when it comes to comparing the performance of two of the biggest e-commerce companies in the world. However, looking at data from previous quarters, Amazon is clearly outperforming eBay when it comes to sales growth in e-commerce. eBay delivered a total increase of 14% in revenues during the fourth quarter of 2013, and revenues in its marketplace operations increased at a lower annual rate of 12% during the period.

eBay is performing soundly, but the company is no match to Amazon when it comes to revenue growth.

Wal-Mart is in a very different situation, though; like many traditional retailers, the company is being hurt by the online retail paradigm and the relentless competitive pressure inflicted by Amazon. Wal-Mart reported a lackluster increase of 1.4% in sales during the quarter ended on Jan. 31. Even worse, the company delivered declining same-store sales in the U.S., both for the quarter and the full year. Comparable-store sales in Wal-Mart U.S. declined 0.4% in the 14 weeks ended on Jan. 31, and 0.6% during the 53-week period.

Whether it's measured against online competitors like eBay, or brick-and-mortar retailers such as Wal-Mart, Amazon's performance is certainly extraordinary.

Foolish takeaway
Due to its minuscule profit margins and aggressive competitive drive, Amazon is a particularly risky investment proposition. However, performance during he last quarter confirms that things are going according to plan, and Amazon is leaving its competitors in the dust while generating explosive sales growth and consolidating its competitive position.

If you liked Amazon before the earnings report, maybe you should like it even more at cheaper prices.