Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Amazon.com (NASDAQ:AMZN) are surging 14% in after-market hours trading after reporting its first quarter results. Shares rallied to levels of $223 per share, just 10% shy of all time highs.

First Quarter Results

Amazon reported first quarter earnings of $130 million, $0.28 per share. Although earnings per share fell 35% compared to last year's earnings of $0.44, the results beat analysts consensus of $0.07 per share.

Operating income fell from $322 million last year to $192 million this year despite the fact that net revenues increased 34% to $13.18 billion, which exceeded the analyst expectations of $12.9 billion.

The company remains very happy to sacrifice short term profitability by launching new Kindle versions and increases investments in distribution and logistics by opening 13 new warehouses in 2012. Last year the company spend some $4.6 billion in its distribution capabilities. The company more aggressively embedded the usage of third party vendors on its website in an attempt to increase profits as Amazon.com earns an "easy" 10% commission on third-party sales.

CEO Jeff Bezos comments on the results and is particular enthusiastic about the Kindle sales, which is now the second best selling tablet in the nation. " I'm excited to announce that we now have more than 130,000 new, in-copyright books that are exclusive to the Kindle Store - you won't find them anywhere else."

North American Division

Revenues increased 36% to $7.4 billion with operating income increasing 20% to $349 million. Media sales increased 17% to $2.2 billion with electronics sales up 44% to $4.8 billion. The North American business now represents 56% of total firmwide sales, up 1% on the year.

International Division

The international division reported a strong revenue growth of 31% while operating income fell to $49 million, down 72% on the year. Media sales increased 21% to $2.5 billion while electronics sales were up 40% to $3.2 billion.

Outlook

For the current second quarter Amazon expects sales to come in between $11.9 and $13.3 billion, up between 20 and 34% on the year. The company continues to expect subdued profitability. Amazon expects to report an operating loss of $260 million in the most negative case, or a profit of $40 million in the most favorable outcome. This guidance comes short of analyst expectations who expect the company to report $184 million in operating earnings for the second quarter. The outlook guidance excludes the impact of the acquisition of Kiva Systems, expected to close in the current quarter.

Valuation

Amazon ended its first quarter with $5.7 billion in cash, equivalents and marketable securities. It held about $2.6 billion in long term debt for a net cash position of roughly $3.1 billion. After today's jump in after hours trading shares are valued at $101 billion, valuing the operating assets around $98 billion.

This values the firm at 2.0 times annual revenues and an incredible 155 times 2011's annual earnings as net margins have fallen to 1.3% for the entire year of 2011. The valuation multiple compares to the other internet marketplace eBay (NASDAQ:EBAY) which trades at 4.4 times annual revenues.

Currently the company pays no dividend.

Investment Thesis

Under the leadership of founder and chief executive Jeff Bezos the company has increased its focus on the customer and the customer experience in recent years. The company is very happy to sacrifice short term profitability in order to generate growth in its online store by simultaneously providing excellent customer service, sharp pricing and better distribution. Amazon's commitment to deliver the "ultimate" shopper experience is devastating for traditional brick-and-mortar retailers like BestBuy (NYSE:BBY) and Radioshack (NYSE:RSH) as they fail to compete on an equal level.

The company is on track to generate well over $60 billion in revenues for the full year but margins remain depressed driven by increased investments in distribution capabilities and rumored to be loss making Kindle sales. For the first quarter net margins have fallen to a mere 1.0%

The company remains on an aggressive revenue growth trajectory, yet shareholders have to be patient as Amazon is not yet wiling to increase it margins. The company maintains its aggressive hiring policy adding some 9,400 employees to its workforce in the last three months alone. It sees more value investing in the business in the meantime as an alternative to settling for higher steady margins and paying a decent dividend.

Investors agree with Bezos and today's after hours jump brings shares in reach with the all time high of $247 set last October.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Amazon.com: Investors Are Cheering After Another Quarter Of Margin Sacrifices

Check out Seeking Alpha’s new Earnings Center