AMZN Summary: Misleading Gain

At first, Amazon (AMZN - commentary - Cramer's Take) looked like it reported a truly blowout number, but then came the news that the headline figure included a gain on the sale of its European DVD business. I don't like this; the company should have reported a number in the press release net of this gain. The confusion led to a temporary spike in the stock (I'm sure those buyers are pissed), which quickly faded. Without that gain, it looks like the EPS number was in line, while revenue of $4.06 billion was ahead of estimates.

The company said that it enjoyed higher unit growth during the quarter, although promotions like free shipping and aggressive pricing on items mean that gross margins were lower than last quarter. Inventory turns were higher also.

The number of active customers grew during the quarter to 81 million. And the Amazon Web Services developers grew by 30,000 to more than 400,000. When asked about the impact of high fuel prices, management said that at the margin it believes high gas prices help their competitive position, as it costs less to order goods from home and take advantage of free shipping vs. getting in a car to drive to a store.

Here are some additional metrics:

Worldwide Media sales rose +31% year over year; Worldwide Electronics & General Merchandise grew +58%.
North American revenue grew +35%, while International revenue grew +47% (without the benefit of currency gains, International revenue growth would have been +34%).
International sales now account for 47% of total revenue.
International gross margins rose during the quarter (benefit of Amazon Prime.)
Free cash flow grew +16% year over year.
ROIC was 29%, down from last quarter.

In terms of guidance, management issued in-line revenue guidance for the third quarter of $4.2 billion- $4.43 billion (vs. $4.23 billion consensus). For full-year revenue, the company raised the range just slightly to $19.35 billion- $20.1 billion (vs. the $19.61 billion consensus). The company also expects operating income next quarter of $115 million-$160 million (growth of -6% to +31%, quite a range), and for full year of $745 million-$920 million (+14% to 40%). It also stuck by its goal of long-term ROIC levels of more than 100%. That is a long way from today's levels, and I still don't see how it gets there, especially considering every couple of years, it seems to need a major tech spend to remain competitive.

As for the stock, it is still trading higher after hours, and will likely be up tomorrow. There continues to be some confusion about the gain the company reported, but I'm sure it will be clarified tomorrow. The company continues to execute well and post solid growth. But if I had to rank my favorite tech stocks (Is AMZN still a tech stock, or a retailer?), it wouldn't be at the top of my list. And I agree that in a weakening economy, it is hard to maintain that premium valuation.

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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.