Amazon.com numbers impress. Why?

On Thursday we had second quarter earnings from the lead online retailer in the world, Amazon. This is a very interesting company to analyze because it is embracing a huge expansion plan in order to produce big profits in the future. This is unusual for a company with a market cap of over $100bn yet is not actually making much money for the time being. Investors are putting a huge amount of faith into the future of this company. When you look at the fundamentals you can see why.

Earnings came in at 0.01c a share for the quarter. This came in below consensus because of some once off costs related to an acquisition. Analysts expect the company to make around 81c in 2012, $2.50 in 2013 and $5.35 in 2014. For a company trading at $237 you are paying 44 times 2014 earnings. Are investors crazy? The stock shot up 8% after this release indicating even more positive sentiment.

I think the best way to value this company until they make profits is via revenues. This Seeking Alpha article has done the hard yards for us already. "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 and 3.0 times for Groupon. Currently Amazon.com does not pay a dividend."

Just to remind you, and we have written about this before, the Amazon share price went through quite a slump from about October last year to about March this year. During this period two quarterly reports came out which showed a big decrease in margins for the company on the back of big capex and of course the Kindle Fire which is so cheap the company almost loses money from this hardware device. During this time management kept reminding investors to be patient as the company was focusing on future growth at the sacrifice of current earnings.

Well in this latest report we have the first signs of this margin growth which explains why the share price has done so well in recent months. Thanks to some of their newer businesses such as 3rd party sales, gross margins reached 26.1% compared to consensus of 24.4%. 3rd party sales involves a 12%-15% cut which Amazon take from third party vendors who sell their products through the website. Their platform is amazing and has a huge following so this newish business is seen as one of the big profit drivers of the future. They are spending big money on their distribution capabilities which should put them first on the list for most retailers as delivery needs to be extremely efficient when it comes to internet orders.

Jeff Bezos, the founder and CEO is a Steve Jobs like character and we trust him and his management team to make the right decisions for a company at the forefront of what is quite clearly the future of global consumption. Although expensive we still like the stock.