's Bezos Continues To Create Long-Term Value

Jul.29.12 | About:, Inc. (AMZN)

Shares of (AMZN) rose almost 8% on Friday after the company published its second quarter results. Shares rose to $237 per share, approaching its all time highs set in October last year.

Second Quarter Results reported a 29% increase in second quarter revenues to $12.83 billion. Sales were negatively impacted by $272 million as a result of a strong US dollar. Operating income fell from $201 million to $107 million. Net income fell 96% to a mere $7 million, or $0.01 per share. Analysts were anticipating earnings of $0.03 per share. Earnings fell as the company took a $65 million charge related to the acquisition of Kiva Systems, back in March of this year.

Amazon, which backs LivingSocial, said that the coupon company posted $138 million in revenues for the second quarter, compared to $59 million last year. At the same time losses narrowed from $198 million to $93 million. The company starts to become a worthy competitor of Groupon in the online coupon market. Shares of Groupon rose almost 15% on Friday, despite the strong performance of LivingSocial.

The company furthermore announced that it already opened 6 new fulfillment centers in 2012, with another 12 planned for the second half of 2012. The centers speed up deliveries while reducing shipping costs.

CEO and founder Jeff Bezos commented on its distribution capabilities:

Amazon Prime is now the best bargain in the history of shopping. We successfully launched Prime seven years ago with free unlimited two-day shipping on one million items.

Segmental Information

North America

Sales in North America rose 36% to $7.3 billion, while operating income rose 61% to $344 million. Media sales rose 18% to $1.87 billion, while electronic and general merchandise posted a 41% growth to $4.94 billion.


Sales in the international division rose 22% to $5.51 billion. Excluding the adverse impacts of a stronger dollar, sales would have risen 28%. Operating income for the international division fell from $172 million to a mere $16 million. Media sales rose 8% to $2.24 billion, while electronic and general merchandise reported a 34% increase in revenues to $3.22 billion.

Outlook guides for third quarter revenues of $12.9-$14.3 billion, a growth of 19-31% compared to last year. The company expects to report an operating loss between $50 million and $350 million for the quarter. This compares to an operating profit of $79 million last year. The guidance includes $275 million in anticipated stock-based compensation expenses and amortization of intangible assets. Analysts expected the company to guide for third quarter operating profits of $120 million on revenues of $14.1 billion.

Valuation ended its second quarter with $5.0 billion in cash, equivalents and marketable securities. The company operated with $2.5 billion in short and long term debt for a net cash position of $2.5 billion. For the first six months of 2012 the company generated revenues of $26.0 billion, on which the company net earned $137 million, or $0.30 per share. At this rate the company is on track to generate around $60 billion in annual revenues on which it is expected to report a small annual profit.

Based on Friday's market capitalization of $107 billion the company's operating assets trade around 1.7 times annual expected revenues. The valuation compares to an annual 2011 revenue multiple of 5.0 times for eBay (EBAY) and 3.0 times for Groupon (GRPN). Currently does not pay a dividend.

Investment Thesis

Shares of have already returned 37% so far in 2012. Under command of its founder Jeff Bezos the company is willing to sacrifice short term profits for long term gains. Over the past decade shares have risen an astonishing 1,700%.

The company is still in the middle of an unprecedented investment boom which depresses short term profitability. By investing in distribution capabilities the company hopes to soon offer same-day delivery, beating all of its competitors on customer service. Over the past quarter more efficient fulfillment and economies of scale resulted in a 30 basis point reduction in shipping costs to 4.6%.

Furthermore LivingSocial is making progress in the online coupon market, while the Kindle tablet should provide the company with access into the mobile phone market. made massive investments in the technology side of the Kindle to be ready for the very important holiday quarter near the end of the year.

Some investments are paying off already. 3P, or third-party sales are boosting Amazon's gross margins. takes an estimated cut between 12-15% for third party vendors selling products through the website. The 8% jump in Amazon's share price is largely attributed to the fact that 3P is guiding the company towards improved long term profitability.

Long term bears on the stock are focusing on an irrelevant valuation metric. They point out that trades at incredible price-earnings ratio, however short term earnings are not the focus point of Bezos at the moment. The company remains on track to generate annual revenues of $100 billion by 2015.

The lack of short term profitability goals allows the company to create a long term sustainable competitive advantage by offering merchandise at superior prices and delivery. As such the company continues to dramatically change the US retail competitive landscape.

For long-term, growth-oriented investors, a long position in is recommendable.

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