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Amazon's (NASDAQ:AMZN) stock has gained about 43% over the past 12 months. Despite the ridiculously high price multiples, investors have been pouring in and the stock has been soaring for the past five years. It shows the success Jeff Bezos has had selling his vision to investors as well as customers. The company has now branched out into different industries growing and achieving considerable diversification. In the process, it has also opened itself to competition from a wide range of small and large companies including the likes of Apple (NASDAQ:AAPL), eBay (NASDAQ:EBAY) and Netflix (NASDAQ:NFLX).

Earnings and Financial Performance does not Matter?

Despite Amazon's strong positioning in the industry, the company has not reported substantial profits for investors over the years. This is essentially due to the corporate strategy of the company, which aims for growth in the long run. Therefore, the company takes actions that are not entirely based on immediate or medium-term profits. In fact some of the more profitable business activities of the company were started approximately 8 - 10 years ago with only the prospect of long-term growth.

The growth strategy seems to have succeeded for two reasons. Firstly, as I mentioned above, Bezos has been able to sell his vision - revenues have increased; however, increased revenues have not been converted into earnings and cash flows. The increase in stock prices despite the lack of profits suggests that the investors are willing to accept the long-term view of management. Secondly, there are enough growth opportunities for the company in the online-retail business that it can continue to grow for the next five-seven years. Investors are aware of this prospect and it makes their belief in the strategy even stronger.

Amazon Web Services: Future Growth Driver?

Amazon has substantially benefited from the introduction of cloud technology due to its considerable capacity in data centers. Amazon Web Services (A.W.S) is the biggest player in the segment at the moment; although, the company does not declare, it is believed that the segment brings in revenue of around $1 billion. The services were made available to outsiders as the company hosted operations of a diverse range of businesses. Amazon was successful because along with the capacity and availability of power, Amazon was able to extract decent margins out of this segment. The growth of this business appears to be much stronger as cloud technology continues to evolve. Such investments help in maintaining the faith of investors regarding the future by maintaining both, growth and profitability.

Kindle Fire: Not Your Ordinary Tablet

Kindle Fire is not your ordinary tablet - the company was rumored to be selling the tablet at cost. Competing with iPad, this tablet remains low priced. Specifically with the introduction of iPad Mini, Amazon's margins on the hardware are likely to remain slim. The interesting point is that Amazon will earn substantially from the devices in Kindle Fire, which are aimed to promote the shopping services of the company.

The company has also managed to attain more than 20% of the market for digital music downloads. This is one of the segments that demonstrate a sizable support from Kindle Fire, and continues to take over the market share. Consequently, Apple's market share for digital music downloads has decreased from 69% in 2009 to 63% in 2012. Among the new and diverse investments, Amazon has allocated a part of its resources towards warehouses. In this segment, Amazon serves as a fulfillment company, not just for itself but also for third-party products. This segment has reported a 50% gain in sales.

Conclusion

Amazon's view of long-term growth is a decent approach toward investment and expansion. Such strategic investments are likely to improve the earnings of the company and deliver value to its shareholders. The management of the company has shown a remarkable improvement in terms of business strategy.

It is clear that investors of the company are investing in its future. However, based on the current performance, price multiples cannot be justified. Amazon might become hugely successful and bring those multiples in line with the performance of the company or, we might see a substantial decline in the stock price. The market eventually makes the correction and multiples come down to the normal levels, and for this to happen, Amazon will need to substantially increase earnings or the stock price will have to come down.

Source: Amazon: Is Future Growth Enough To Justify Current Valuation?