Amazon (NASDAQ:AMZN) reported another quarterly result and its earnings missed estimates and the guidance for the next quarter were below expectations to make matters worse. Yawn. I mean seriously I understand the bearish argument here that the company has to make money someday. It is an easy argument to make. However, if you are desperately in need of a growth company to short, find one that has a business model that is not becoming so deeply ingrained in the lives of both consumers and corporate America that you actually have a chance to see your trade work over the long run. I do not deny that shorting Amazon can work if you're a great trader. However, listening to anyone who has been a perma bear on Amazon would have cost an investor much money over the years. Could the company continue to sell off in the short term? Absolutely. Are there legitimate questions about when the company might finally earn a material profit? Yes. Are there many other companies out there approaching $100 billion in annual revenue that are still growing the top line at 20% per year? Yes! Wait, that was a mistake on my part. I forgot that Amazon is for the most part in a league of its own when it comes to sustaining this type of growth rate as it looks to surpass $100B in revenue in FY 2015.
Bigger Moats And An Ever Expanding Addressable Market
Amazon is brilliantly creating long-term moats around its various business lines. What is the likelihood that another e-commerce retailer is willing to invest the tens of billions of dollars on a distribution network to challenge Amazon? How demoralizing is it for competitors to AWS, who might need to make money on their competing service, to be locked in a battle over who can cut prices the most every year.
How about all the naysayers who slammed the idea of Amazon being able to hike the price of Prime to $99 a year. I imagine the CFO acknowledging that Amazon signed up more Prime users in Q2 of this year, compared to last year prior to the price increase, is still not enough to make the naysayers eat crow?
Speaking of Amazon Prime, for $99 a year I can now get HBO programming, essentially any VOD that my kids want to watch, free two-day shipping (most likely soon to be one day shipping), streaming music, Kindle book sharing, and a partridge in a pear tree. If I were Reed Hastings and Netflix (NASDAQ:NFLX) I would be terrified of Amazon. Amazon is going to throw $100M at original programming which will all run through the P&L in Q3, which most likely was something most analysts were not accounting for in their earnings estimates for the upcoming quarter. Netflix had $900M of content expense for its entire catalogue of programming in its latest quarter. Amazon is throwing $100M at a few pilots like it is chump change. You have to wonder how many dual Netflix / Amazon Prime subscribers will have that AOL deja vu moment one day soon. You remember the day when you realized that clicking an IE icon accessed the internet, and you did not need to pay $19.99 per month anymore for an email account and an annoying dial-up tone to access the internet.
While busy building moats, Amazon is also deploying cash left and right into additional businesses that have the potential to disrupt numerous other industries. The opportunities abound, from mobile payments to same day delivery. There are numerous $100 billion dollar + annual revenue markets that Amazon could potentially show up as a new competitor in any day. Again, how many companies can you argue have that type of runway in front of them?
I have always believed, and continue do so today that Amazon could decide to generate billions of dollars of free cash flow at the drop of a hat if the company wanted to and most of its current customers would never know the difference in terms of level of service or product offerings. I read in certain bearish articles on SA that Amazon might run out of cash, or be forced to pay higher rates on borrowing, or other goofy comments to this effect. The fact is, Amazon generated $2 billion of FCF in FY 2013 after spending $3.5 billion on CAPX. I would not be so concerned about this company's ability to generate cash.
The Final Takeaway
Go short any number of businesses with no moat, loads of debt, and growth rates that are lower than Amazon and who also have no GAAP earnings. There are plenty of them out there, and that is where you can make money on a long-term short trade. Amazon is a fundamentally sound company, with arguably the most innovative CEO in the US today, and a stated goal of re-investing in the business for the long term. If you want to short the company as a trade be my guest. However, don't be conned into thinking that the smart money cares whether or not Amazon missed their earnings estimates or guides down the next quarter. These investors have great short-term memories when it comes to Amazon, and as soon as the dust settles, they remember that the runway for this company is still so large that it can not be defined. That is why the smart money has been, and most likely always will be, long Amazon.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.