Amazon Puts Fire Behind It With Rooftop Buy, Cloud Dominance

NEW YORK (TheStreet) -- Jim Cramer has suggested selling Amazon (AMZN) short to buy Alibaba (BABA) , which he calls "Amazon with earnings."

Indeed, Alibaba stock is on a tear, piercing the $100-a-share barrier Tuesday morning. By contrast, TheStreet has downgraded Amazon shares to a "sell" with a rating of D+. It's as fashionable as last year's super model.

Or this could be an opportunity, like a pre-split Apple (AAPL) was at $400; last week Chris Ciaccia indicated he thinks Amazon has that kind of opportunity in front of it now.

A turn may hinge on Amazon's purchase of Rooftop Media last week.

Rooftop Media represents comics, a proven vein of talent. It turns stand-up comedy routines into Web audio, then distributes the shows through a host of outlets, including Amazon. The new acquisition will be run by Amazon's Audible unit, which sells spoken books as audio downloads.

The deal indicates Amazon knows it is now playing in the entertainment big leagues and is seeking follow-ups to Garry Trudeau's Alpha House. There's life in the old girl yet.

Yes, Amazon had a big misstep with its Fire Phone, but it has put the Fire out. The company took a $730 million write-off for the Fire Phone during the third quarter. That's what made its quarterly loss of $437 million -- or 94 cents per share, fully diluted -- bigger than any annual loss over the last several years.

The rest of the business is operating normally.

Amazon's cloud platform had revenue of about $1.4 billion in the last quarter. The only folks who can keep up in public cloud services seem to be Google (GOOG) and Microsoft (MSFT) . Amazon classes its cloud revenue under "other." 

Microsoft may show more revenues than Amazon by year-end, but that's because it lumps the use of Windows services on its platform with cloud revenues, while Amazon just sells base infrastructure.

The company continues to churn out cash from operations, $1.766 billion in the most recent quarter against $1.388 billion a year ago. Sales are continuing to grow at 20% per year, with nearly $20.6 billion for the most recent quarter. Free cash flow was $1.1 billion for the year ending Sept. 30, against $388 million for the previous year.

Amazon has invested $2 billion in India, a key growth market, and should start getting a return there soon.

If you separate Amazon's tech revenues -- in streaming and cloud -- from its merchandise sales, its present valuation looks reasonable.

Figure $5 billion in cloud revenues for 2014, with $3.8 billion in "other" already booked so far this year, and $20 billion in "media" sales. Apply Google's price-to-sales ratio of five on that, and the remaining $60 billion of merchandise sales are valued at just $30 billion, in line with what investors are paying for companies like Costco (COST) that don't have anything like Amazon's growth rate.

There are still plenty of reasons why those who invest in Amazon now will have their patience rewarded. That may be why it was up 1.94% at Tuesday's close.

At the time of publication the author was long GOOG, GOOGL, AMZN, COST and AAPL.

Follow @danablankenhorn

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


TheStreet Ratings team rates AMAZON.COM INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate AMAZON.COM INC (AMZN) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, generally disappointing historical performance in the stock itself, poor profit margins and feeble growth in its earnings per share."

You can view the full analysis from the report here: AMZN Ratings Report

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