Amazon.com (AMZN) isn’t breaking the rules, it’s making new rules.
One-Year Chart
So last quarter AMZN missed estimates big time. Profits were expected to be down 8%, and the company had profit growth fall by 22%. The stock was expected to fall the next day but instead opened higher because AMZN beat revenue estimates by a wide margin. Trouble was the margin — profit margin was lower than analysts expected.
AMZN stock broke past $200 this week. The chart on the right snows -33% profit growth last quarter and -22% growth for this quarter. Not so great, yet the stock is making new highs.
Earnings Table
The earnings table has more red than green. Last year AMZN stated it would take 2011 to build its International infrastructure. This means warehouses and such. That takes money, and AMZN has never been shy about foregoing current profits for future ones. The nice thing about this strategy is it works! AMZN has grown profits — you can see and feel that the extra expansion has been a great investment.
Amazon is a leader in website hosting & cloud computing. The company rents out space in its arsenal of servers and storage. Big firms like FourSquare (a restaurant check-in social media site) use Amazon to house the data. This is a big deal — Amazon is a leader in cloud computing. That takes investment.
Google on the other hand seems to spend money on nice things that might not pay-off. I love Google maps, it really doesn’t bring in big bucks. GOOG’s recent spending may-or-may not help drive profits. Amazon’s will.
Back to AMZN’s Earnings Table. Estimates got slashed big time. Growth looks solid 4QtrsOut but it looks like those numbers will likely fall.
Fair Value
With 2011 profit estimate falling from $3.20 last quarter to $2.45 now, AMZN stock is selling for 84 times earnings. And the stock keeps going higher. That’s what I mean about AMZN making new rules — you really have to look more than three years out to assume what this company could make. The heavy investment into IT and International warehouses will no-doubt pay off, in the meantime the outlook is soo bright that the investment world is pushing the stock higher while ignoring the 84 P/E.
Bottom Line
I sold AMZN last year, knowing thig heavy investment would hurt profits. It has, but the stock has still gone higher. If you own the stock hold it and find out what surprises lie ahead. If not well buying AMZN here is a speculative investment. I can’t buy this stock here. I’m following old rules.
