NEW YORK ( TheStreet) -- Amazon.com ( AMZN) reports earnings on Thursday. The stock ended Friday's session up nearly 1% at $228.29, outperforming Apple ( AAPL) as well as the PowerShares QQQ Nasdaq 100 ETF ( QQQ). In fact, last week -- the week before both companies report -- Amazon got the better of Apple and the NASDAQ 100.AMZN data by YCharts
AMZN bears have been waiting quite some time for the stock to tank. Fellow TheStreet contributor Robert Weinstein recently wrote two worthy pessimistic cases against the stock. (See Amazon Isn't Worth Half Its Current Price and Amazon: No Such Thing as Free Shipping). For months, Robert and I have engaged in a private difference of opinion over AMZN. In the last several weeks, we've taken it public via TheStreet. The debate gets at core investing issues. On the surface, it asks, Does valuation matter? However, you cannot leave the conversation there. It requires context. Fleshing it out, in Amazon's case, it's quite clear -- and not as crazy a thought as bears make it out to be -- valuation absolutely does not matter. Save a perfectly normal pullback here or there, Amazon stock continues to perform incredibly well. It was one of only a quarter of Nasdaq stocks to buck the downward trend on Friday. Objectively speaking, to this point, valuation has not mattered. Clearly, as it pertains to AMZN, investors use the P/E ratio as less of a valuation metric and more as a way to measure confidence in the company's ability to grow the top and bottom lines going forward. The bulls get this because they understand Amazon's culture and the way CEO Jeff Bezos has run the business for the last 13 or so years. Bears such as Weinstein do not. Consider the assessment he made of Amazon's margins in the first of the two above-cited articles:
The most probable outcome when Amazon attempts to raise prices in order to increase margins is a loss in growth. In order to bring its P/E multiple to a "reasonable" retailing level of 35, Amazon needs to triple its net margin. Pendola suggests locking customers into the Amazon ecosystem is a valid substitute for profits.That's not quite what I suggest. In any event, let's address Weinstein's discussion of Amazon's margins. First, have a look at the last two years' worth of capital expenditures at Amazon versus the company's profit margin. AMZN Capital Expenditures data by YCharts
If we are to believe Amazon's capital expense guidance for the second quarter, expect them to report that it came in somewhere between $800 million and $900 million when the company releases second-quarter results on Thursday. That's more than double the first quarter number of $386 million.
AMZN Profit Margin data by YCharts
Revenue has more than tripled over the last five years, yet profit margin has not. That's what happens when companies act aggressively to seize long-term growth opportunities. That's the phase in which Amazon finds itself. Investors should not want or expect Bezos to say, You know, we've spent enough, let's leave our long-term future and some market share on the table to impress short-term thinkers with a better bottom line today. That would be patently absurd and a reason to ditch bullish sentiment.
That chart also shows us, as clear as possible, that this process takes time to develop. It occurs over years, not a couple of quarters. Ironically, we invest alongside market participants who chide Internet companies. They long for the days when companies that "actually made something" and "built real businesses" received the hype not money-losing new media initial public offerings. While I do not agree with that incessant whine, I do find it funny that these same people do not throw full support behind Amazon, a company clearly investing for the long-term, not quick overnight and unsustainable profits. Heading into earnings, I would stay away from a straight directional bet on AMZN. The profit margin could sink commensurate with the expected massive second-quarter increase in capex. At least temporarily, the market will not like this. If things play out this way, the stock could very easily retest recent lows below $200. If you remain bullish in the face of this noise, it could make sense to sell AMZN puts to generate income and possibly pick up shares on a pullback. As always, I prefer to have the cash to support this type of trade. Always opt for cash-secured puts over naked ones. You could use income generated by selling the puts to position yourself for a possible earnings beat or otherwise solid report and associated upside in the stock. For example, as of Friday's close, selling an AMZN August $210 put brings in about $4.55. You could put those proceeds towards the purchase of AMZN August at-the-money or slightly out-of-the-money call. In any event, proceed with caution. Personally, I prefer to stay completely on the sidelines at earnings with the exception of finding a way to get long on short-term weakness in stocks well-prepared for the long-term. Follow @RoccoPendola At the time of publication, the author held no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.