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Summary

  • The fact that Amazon has yet to approach its critical mass is reason enough for investors to remain patient. It's at that point profits will start to matter.
  • With the stock trading at around $324 per share, down 20% from its 52-week high of $407, I would be a buyer before this afternoon's report.
  • Consider that the highest price target on the stock stands at $500. The way I see it; these shares are a sure bet to $400, which is arguably too conservative.

It is increasingly difficult for investors to decide if they should keep Amazon (NASDAQ:AMZN) in their portfolio. Very few companies present the dilemma that exist between trading and investing. Value investors struggle to appreciate Amazon's potential, given how its fundamentals seem to contradict its actual financial condition. Amazon's P/E ratio, which now exceeds 500, remains one of the most popular-cited bear arguments. But to complain about a tech valuation... you might as well complain that water is wet.

Amazon's CEO, Jeff Bezos is not dumb. His razor-blade model and effective marketing has killed off traditional booksellers and disrupted the entire retail space. Bezos knows exactly what he's doing. Now hearing notions that because of Amazon's new Fire TV, Amazon's ambitions are getting misguided. And the company's stock price is once again the major drawback. From my vantage point, Bezos is looking for more ways to further differentiate Amazon's services.

It wasn't long ago that investors launched these same complaints about Google (GOOG GOOGL). They wondered how "a mere search engine" could make money. Today, no one is searching for these answers anymore. Google has produced the results. So will Amazon. It's just a matter of time. This afternoon, when Amazon reports its first-quarter results, Bezos will demonstrate why his company deserves more time to execute and why he is regarded in the same breath with Apple's (NASDAQ:AAPL) former CEO, Steve Jobs.

As with prior quarters, analysts continue to be optimistic ahead of Amazon's announcement. Analysts will be looking for a profit of 22 cents per share, which represents a 22% year-over-year jump. Last year, Amazon reported 18 cents per share. While this estimate is down considerably from three months ago (was 53 cents), the EPS estimate has risen by one penny over the past 30 days. For the fiscal year, analysts are expecting earnings of $1.92 per share, which represents a 225% year-over-year surge.

In terms of revenue, the Street will be looking for a 21% year-over-year jump to $19.43 billion for the quarter. This will top last year's total by $3.36 billion, when the company posted revenue of $16.07 billion. For the year, revenue is projected to roll in at $89.89 billion, which is expected to increase 20% year-over-year.

But the prevailing question is going to be around Amazon's profitability. Sure, earnings haven't been spectacular and margins have underwhelmed. But in the January quarter, Amazon posted a surprise profit, which snapped two straight quarters of losses. What's more, it seem no one remembers that the company also posted gains of 240 basis points in gross margins. Margins were up to 26.5%. This occurred even with higher fulfillment and marketing costs.

Amazon's lack of profits will continue to be a popular argument. But this is not your average growth story. Bezos is actively building the type of product and service he believes will get consumers to keep coming back. This model has worked for both Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX). To that end, it's a mistake to assume Bezos doesn't know what he's doing. In fact, everyone is Silicon Valley is following his model. Amazon is setting the new standard.

What's more, the fact that Amazon has yet to approach its critical mass is reason enough for investors to remain patient. It's at that point profits will start to matter. With the stock trading at around $324 per share, down 20% from its 52-week high of $407, I would be a buyer before this afternoon's report. Consider that the highest price target on the stock stands at $500. The way I see it; these shares are a sure bet to $400, which is arguably too conservative. And with rumors of an Amazon phone still swirling around, there are plenty of gains to be had and plenty of growth opportunities ahead.

Source: Why Amazon Is Heading To $400