Superb Execution at Amazon.com

For Kahn's preview heading into the Amazon.com conference call, please click here.

Damn the margins, damn the discounts! Amazon.com (AMZN - commentary - Cramer's Take) reported a blowout quarter given the subdued expectations in this environment. The company beat on both the top and bottom line, demonstrating exceptional expense control and superb execution.

The Internet retailer reported revenue of $6.7 billion, up 18% from a year earlier, and earnings of 52 cents a share, beating the earnings estimates by 13 cents.

I was correct on expecting gross margins to show pressure, as those fell to 20.1% from 23.4% last quarter. But operating margins really surprised me. I figured they would be down from last quarter's level of 3.6%, but instead they rose to 4.1%. Nice job.

Here are some of the pertinent metrics:

• Revenue: North American revenue rose 18%, and would have risen 24% adjusted for foreign exchange. International revenue rose 19%.
• Media: Worldwide media sales rose 9%, while worldwide electronics and general media sales rose 31% and now account for 39% of total revenues, up from 35%.
• Free cash flow: It totaled $1.36 billion, up 16% from a year earlier.
• Return on invested capital: It rose to a very strong 41%. Amazon still projects long-term ROIC levels of 100%, and that would be impressive.
• Stock repurchases: The company purchased $100 million of its stock, which basically offsets dilution. Cash on the balance sheet rose to $3.7 billion.
• Guidance: Revenue guidance was very solid, with a range offered at $4.52 billion to $4.92 billion, versus consensus estimates for $4.53 billion. Operating income guidance was basically in line at $200 million to $285 million.

Regarding Kindle, management confirmed the strength in demand, but completely skirted the issue of production errors or being sold out of the product. Management didn't mention it one bit, nor acknowledge getting a better handle on supply going forward.

All Amazon said was that Kindle was spurring incremental purchases of eBooks, but not at the expense of physical books. This implies the company isn't seeing a lot of cannibalization, which doesn't make all that much intuitive sense. I mean, if I bought the eBook, why would I also buy a physical copy of it?

Management also didn't address the macroeconomic concerns directly, but said it has not changed its pricing strategy, and is trying to remain laser-focused on the customer experience.

The stock got a big after-hours boost from the earnings beat. If you're trading the stock, you might get a little ride from this bullish report and guidance. But big picture, my comments from my preview don't really change. I still think that the rich valuation doesn't make for a very attractive long-term investment. I would rather wait for a bigger pullback at some point as a better entry point, because long-term, I like the way management continues to execute on its business plan.

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Know What You Own: Amazon.com is an Internet retailer. Related stocks are Barnes & Noble (BKS - commentary - Cramer's Take), eBay (EBAY - commentary - Cramer's Take), Hastings Entertainment (HAST - commentary - Cramer's Take), Overstock.com (OSTK - commentary - Cramer's Take), Borders (BGP - commentary - Cramer's Take) and Books-A-Million (BAMM - commentary - Cramer's Take).

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At time of publication, Kahn had no positions in the stocks mentioned.

Jordan Kahn, CFA, is a portfolio manager with Bevery Investment Advisors, a Beverly Hills, Calif., money manager. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Kahn appreciates your feedback; click here to send him an email.