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Amazon Continues to Answer Critics, But...

That said, I am fully aware it is not uncommon for the market to care very little about valuation metrics when a company such as Amazon is producing growth in excess of 30%. But what happens when it stops? Earnings will start to matter. As disappointing as this quarter was in terms of profitability, it followed the second quarter during which EPS fell dramatically by 97% year-over-year.

That the stock still surged post the announcement suggests that investors don't care and instead continue to salivate over the company's top-line growth. But that growth is coming at an incredible cost as evident by the 42% increase in operating expenses. Consequently, operating margins declined by 93 basis points. The company has answered questions of whether its growing expenses can produce sales. But will these investments ever pay off by way of profits?

Bottom Line

That the stock is up over 50% on the year and almost 200% over the past three years speaks to the confidence that investors have in the company's ability to deliver on its promise. But Amazon cannot rest easily. Apple, Google and now Microsoft (MSFT - Get Report) have their own plans for acquiring market share. What's more, I continue to wonder if Amazon will be able to sustain its growth in pre-tax profits as well as improve its gross margins in areas where it has invested so heavily.

So far the company has answered several of its critics that have wondered can it grow into its valuation. In the meantime, investors continue to bet heavily that Amazon's growth will maintain its torrid pace -- even if it means sacrificing near-term profits. But with the company having acquired a P/E ratio that have soared to nose bleed levels, for investors' sake, let's hope the words "sacrifice" and "bleed" are never used together to answer future questions regarding Amazon.

At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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