Stock Analysis: Amazon Keeps Going Higher and Higher

Amazon’s third quarter impressed analysts and excited investors as the stock more than doubled in price since the start of

Amazon, Inc. (AMZN:Nasdaq) is having an impressive run that has now continued for the last two quarters, beating analyst predictions and more than doubling the share price. The company’s third quarter earnings report smashed expectations for the second time in a row, and with shares skyrocketing from the beginning of the year, the company’s performance does not seem to be slowing.

Boosted by the unbridled success of Amazon Web Services (AWS), the company’s cloud infrastructure service, revenues are on a decidedly upward trend. The company has also managed to continue growing net income, although not at the pace some analysts would like to see. With the holiday season coming up, Amazon is poised to continue its impressive run of quarterly earnings.

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A Monster Third Quarter

Amazon’s third quarter earnings report impressed analysts who had predicted much more modest results, and excited investors who have been rewarded by a rise in share prices that has seen the stock more than double in price since the start of the year. For the third quarter, the company reported revenues of $25.36 billion, a 23% year over year increase, and well over analysts’ estimates of $24.90 billion for the quarter. On top of that, the company reported net income of $79 million (0.17 per share), dwarfing the -$437 million ($0.95 per share) loss during the same period a year ago.

Operating income increased from the same quarter in 2014, reversing from a loss of $544 million to income of $406 million.  Operating cash flow improved to $9.80 billion from $5.70 billion over the trailing twelve months while free cash flow experienced an astounding rise from $1.10 billion to $5.40 billion over the same period.

Perhaps more impressive than Amazon’s overall performance was the continued explosive growth of AWS, Amazon’s cloud computing service. The division managed to grow revenues by a blistering 78% to $2.09 billion. For the third quarter, AWS generated $521 million in operating income. Despite accounting for only about 8% of the company’s total revenues, the divisions operating income alone accounted for 52.5% of the company’s total operating income. Since the company started reporting AWS revenues, the division has become a centerpiece for Amazon’s future plans.

Amazon’s excellent 2015 has been reflected in the company’s shares. After sitting at a low of $285 per share early in the year, stocks have more than doubled in price to a record high of $675. Despite settling somewhat lower in the lower $640 range, shares have remained fairly constant. Year-to-date, Amazon shares have rewarded investors with a whopping return of 107%. Even though the valuation shows shares trading at a startling price to earnings ratio of 932, Amazon shares have still remained a strong option.

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Moving Forward

Amazon has been working hard to continue expanding revenues. Following its usual strategy of sacrificing margins in order to expand market share, the company has announced major sales for its Amazon product lines. The already cheap Kindle Fire, for example, will drop from $49.99 to $34.99. Amazon’s goal is to increase penetration for all of their devices, regardless of suffering short-term losses in sales.

In the same vein, the company has recently announced that it is planning to open a brick-and-mortar bookstore- a move which is somewhat ironic considering their disruptive activities- that will also serve as a major marketing platform for Amazon’s products. Should these strategies succeed, Amazon could see its long-term revenues continue up the rapid incline as their products are optimized to drive customers to Amazon’s main breadwinner, its e-commerce division.

The company’s media division has also scored big with its Amazon Prime streaming service. At the end of last year, Amazon Prime Video already controlled 18% of the total market share. Despite trailing Netflix by a wide margin, the company has managed to make substantial inroads and progress, creating award winning original content that has been highly acclaimed.

Amazon is also increasing its exposure to the Internet of Things (IoT). The company already has an existing infrastructure in place with AWS serving as an industry leader, and could easily devote some processing power to cloud services for connecting wearable technology. Indeed, the company has already reached an agreement with several companies in the industry to provide them with processing capacity from AWS in order to create an IoT platform for the future. The project, if successful, would enable users to connect more devices to each other and be connected everywhere.

High Priced, But Solid

Amazon seems poised to stretch their success into the fourth quarter and end 2015 on a high note. With the heaviest shopping period of the year already here, the company should see its work pay off in a big way. Investments in the future have helped Amazon carve a strong position for itself in retail and its commitment to innovation has helped it secure its place.

Although the stock is trading not far from record highs, the current lull might provide an excellent opportunity for potential investors to enter. While concerns remain about overvaluation and the stock’s P/E ratio, Amazon has proven that it can consistently deliver big results.  Analysts recognize this momentum with share prices expected to cross the $700 threshold in coming months as optimism and market penetration grow.

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