Amazon.com, Inc. (NASDAQ: AMZN) is one of the top 20 Innovators of The Innovation Index. Amazon.com just announced it's quarterly earnings yesterday after market close. At market close, AMZN had closed at 100.82, up a whopping 156% in 2007.
"The online retail giant reported earnings of $80 million, or 19 cents a share, for the quarter ended Sept. 30, compared with earnings of $19 million, or 5 cents a share, for the same period last year. Revenue grew 41% to $3.26 billion from $2.31 billion last year. Analysts had expected the company to report earnings per share of 18 cents on revenue of $3.14 billion, according to consensus forecasts from Thomson Financial. The company said operating earnings for the period came in at $123 million -- ahead of the $108 million expected by analysts. Last year's third quarter saw operating income of $40 million."- source MarketWatch
Four things emerged from Amazon.com's most recent quarterly earnings results:
1. Amazon.com earnings remained flat at 19 cents a share from the previous quarter. Thus, there was no earnings growth from the previous quarter. Although Amazon.com grew the revenue by $0.38 billion or 13% from $2.88 billion the previous quarter to $3.26 billion in the current quarter. Whereas the total revenue grew 13%, the earnings did not budge - the earnings remained flat. The operating income only grew by 6% from the previous quarter. Does this mean Amazon.com had to overspend to achieve the revenue growth, and hence could not grow the profits?
2. Amazon.com had a huge quarter internationally. "International segment sales, representing the Company's U.K., German, Japanese, French and Chinese sites, were $1.47 billion, up 40% from third quarter 2006. Excluding the favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, International net sales growth was 33%." Compare this to the previous quarter, when "International segment sales, representing the Company's U.K., German, Japanese, French and Chinese sites, were $1.28 billion." This means Amazon.com earnings positively benefited from the exchange rates and the increase in international business of about $0.19 billion. However, the earnings still remained flat.
3. 4th Quarter Guidance: Net sales are expected to be between $5.1 billion and $5.45 billion, or to grow between 28% and 37% compared with fourth quarter 2006. Operating income is expected to be between $221 million and $291 million, or grow between 12% and 48% compared with fourth quarter 2006. This guidance includes $54 million primarily for stock-based compensation and amortization of intangible assets... Thus, Amazon.com is poised to grow the revenue by 62% in the final quarter, the holiday quarter when Amazon.com rakes in the most revenue. The operating income will grow by 108% from the current quarter. When the operating income only grew by 6% from the previous quarter, can investors believe Amazon.com management when they project a growth of 108% of operating income? How would Amazon.com achieve this? What products will provide the increased revenue and profitability for Amazon.com? The new DRM-free MP3 store, or memberships, or 3rd party developers? Amazon.com has recently upped the shared bounty to 20% for the Mp3 store in order to attract increased buyers through its Associate referral program.
4. Operating expenses without the Cost of Revenue increased by $54 million or 9.2% from the previous quarter. This is huge since the generation of an additional 13% growth in revenue resulted in a 9.2% increase in operating expenses. When Amazon.com grows the revenue by 62% in the final quarter, what would be the increase in operating expenses? Overall, Amazon.com's net profit margin and operating profit margins have decreased from the previous quarter. And Amazon.com is planning to not only reverse this trend, but show a healthy increase in the fourth quarter.
Amazon.com closed today at 88.59, down 12.23% from yesterday's close of 100.82.
Here is a comparison of Amazon.com's forward P/E with other retailers (from Google Finance):
Amazon.com, Inc. (NASDAQ: AMZN) Forward P/E: 50.94
eBay Inc. (NASDAQ: EBAY) Forward P/E: 26.86
Wal-Mart Stores, Inc. (NYSE: WMT) Forward P/E: 14.55
Google Inc. (NASDAQ: GOOG) Forward P/E: 32.66
Target Corporation (NYSE: TGT) Forward P/E: 15.30
Barnes & Noble Inc. (NYSE: BKS) Forward P/E: 21.44
Is Amazon.com growing the fastest among all these companies to garner this upside on the earnings multiple? One note of caution: It has the lowest net and operating margins from the above companies (except Barnes & Noble).
Is Amazon.com over-valued, right-valued or under-valued at these multiples? You decide.
About The Innovation Index
The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.
The Innovation Index has returned 119% over the last five years. This assumes an investment in each stock of The Innovation Index (buying each stock). An average of $100 invested in The Innovation Index on December 31, 2001 returned $219 as of December 29, 2006. By comparison, $100 invested in each of S & P 500, NASDAQ and Dow Jones Index returned $124. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by 77% over the last five years.
The Normalized Innovation Index has returned an impressive 174% over the last five years. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001.
Alphabetical list of the top 20 Innovators of The Innovation Index and their stock ticker symbols:
3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)
Yahoo! Inc. - (NASDAQ: YHOO)
The Innovation Index will analyze the positions and standings of the top 20 Innovators at the end of each year. For 2007, there will be no further changes in The Innovation Index.
Disclaimer: I invest in the stocks comprising The Innovation Index.
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