Amazon.com Inc.

Fundamentals

##Symbol##AMZN

Amazon.com stock is now at all-time highs, and seems to be breaking those highs everyday. In the immediate-term that's likely slightly bearish, but I'm here to introduce you to the long-term and why AMZN is quite possibly the most dangerous and innovative company in the world and is going to change the landscape of our lives in abrupt and amazing ways. While I like Alibaba (BABA), this where the two firms are totally and completely different.

On March 15th, 2015 I wrote Why Amazon Stock Will Rise. On June 15th, 2015 I wrote, Why Amazon is growing More Powerful and More Dangerous.

Today we will look together at both of those phenomena, with yet another unbelievable accomplishment with Amazon's first "Prime Day" (discussed in the "revenue" section in the body of this article). But unbelievable won't stop there. There is so much going on with this firm that is fantastic, it's no wonder the stock is ripping, making new highs and scaring every other technology company in the world.

The first visualization we'll examine plots all technology companies over $30 billion, equal spaced on the x-axis (ranked), and R&D in $millions on the y-axis.


Click Here to Interact With This Image

The company spent over $2.75 billion in the last quarter on R&D which is more than Apple and Google. The spending is is trending higher and has seen consecutive increases for nearly 10 straight years on a quarterly TTM basis. And is the R&D working? Try this on for size.

AMZN generates $83,000 in revenue per minute; let's not lose sight of the enormity of the firm's imprint and disruption with respect to online sales. But the company's real goal may be best summarized by Yahoo Finance Senior Columnist Michael Santoli when he said, "I think Amazon is just looking at where people spend time online and they want to have a piece of it." That statement surrounded news that AMZN was now delving into the PC gaming market, but it holds true for all things Amazon.

AMZN revenue (TTM) has broken new highs for over 40 straight quarters, cash from operations spiked to a new high last quarter, the company finally turned an after tax profit and the stock market liked all of that. At the same time, R&D and SG&A expenses are expanding rapidly, although the success of AWS (cloud computing) and brand recognition appear to be the fruits from those expenses. The continuous increase in revenue and upward trend in operating margins make AMZN a compelling company to watch.



Whether the firm turns its attention to profitability will always be the question, but what is not up for debate is the fact that whether it be online shopping, digital music, content (TV) streaming, cloud computing or gaming, Amazon presents a serious threat to all competitors in all spaces. Some transparency surrounding the AWS (cloud computing) side of the business has finally been provided and we can see in charts how that high gross margin business has actually changed the firm's overall cost structure and improved gross margins across the board.

Technicals   |   Support: 429.7   |   Resistance: Stock is Through Resistance   

Golden Cross Alert: The 50-day MA is now above the 200-day MA.
AMZN's 3.10% rise today is critical to its technical outlook.

Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

AMZN has a five bull (top rated) technical rating because it's trading above its 10-, 50-and 200- day moving averages and the stock movement of late has been straight up.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.

EARNINGS ESTIMATES
Earnings Date	EPS	Revenue (Mean)	Revenue (Median)	Last Quarter (Actual)
2015-07-23	$-0.18	$23.7 billion M	$23.8 billion M	$22.7 billion M	Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	91,964	78,123	63,978
Operating Margin (QTR)	1.011	1.01	1.01	RISING
Net Income (TTM US$ Millions)	-406	300	-87	FALLING
Levered Free Cash Flow (TTM US$ Millions)	3,860	2,525	798	RISING
Research and Development (US$ Millions)	2,754	1,991	1,383
Research and Development Expense/Revenue	0.121	0.101	0.086	RISING

Stock Returns and Chart

AMZN is up +23.2% over the last three months and up +63.5% over the last six months. The stock price is up +33.6% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
Click here to interact with this stock chart


Now let's examine the visualizations of the critical financial measures.

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	91,964	78,123	63,978

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case we're looking at 40 consecutive quarters). Revenue is up an impressive 18% year-over-year and 44% over the last two-years. Those are absurd numbers for a company that has basically just failed at entering China and had one of the most embarrassing attempts at an smartphone ever. For all the greatness of Apple and Google, those two firms rely heavily on essentially one product (the iPhone and search for each respectively). That is not the case with Amazon which has prime, retail, hardware and a cloud computing business.

What do all these numbers mean?
AMZN's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.


Click Here to Interact With This Chart

OK, let's look at "Prime Day," as promised. Here's what happened, and this is straight copy and paste from Amazon's press release (emphasis added).

Worldwide order growth increased 266% over the same day last year and 18% more than Black Friday 2014 – all in an event exclusively available to Prime members.
1. Amazon sold more units on Prime Day than Black Friday 2014, the biggest Black Friday ever.

2. Worldwide order growth increased 266% over the same day last year and 18% more than Black Friday 2014.

3. More new members tried Prime worldwide than any single day in Amazon history.

4. Sellers on Amazon that use the Fulfillment by Amazon service enjoyed record-breaking unit sales – growing nearly 300%.

5. Customers ordered hundreds of thousands of Amazon devices – making it the largest device sales day ever worldwide.
6. Members ordered tens of thousands of Fire TV Sticks in one hour, making it the fastest-selling deal on an Amazon device ever.

7. Prime Day was also the biggest day for sales internationally. Customers ordered hundreds of thousands of Fire TV Sticks, making it the best-selling Prime Day product globally.

8. The company sold 398 orders per second.

Remember, this was only available to prime customers -- those people paying $99 a year to be a part of the plan. The number one selling product was Amazon's own created hardware. There are so many things about this data that are bananas that I feel like copy and pasting it again (but I won't).

Keep in mind social media was ablaze with criticism, laughter and anger toward the idea. There was even a great article from the Washington Post entitled While you were making Prime Day jokes, Amazon was laughing all the way to the bank. There was (is) a sort of indignation by everyone that had never bought the stock and was looking for a reason to watch it go down. But it didn't go down. Indignant or not, angry or not, joke making or not, people who have not believed in this company have been wrong, and they have been wrong on a cataclysmic scale. Period. That doesn't mean the stock won't drop, it just means its rise has happened and the company is in position to bully the rest of technology for along time to come.

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Gross Margin %	30.3%	27.8%	25.4%	RISING

Gross margin % has been increasing rapidly as the revenues have been rising. The prime business and the cloud computing business (AWS) are extremely high gross margin lines. If you're wondering if AWS and prime are working, the answer, objectively, is seen clearly in this gross margin % trend. We can no longer make the argument that the revenue from those two business lines are trivial if they are moving the needle this much on a revenue base of nearly $92 billion in the last year.

Let's look gross margin % through time in the blue bars. Note that the most recent quarter was the highest ever for AMZN.


Click Here to Interact With This Chart

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Net Income (TTM US$ Millions)	-406	300	-87	FALLING

There's no doubt that earnings are an issue with Amazon, and by issue I mean, there aren't any. For the most recent trailing-twelve-months (TTM) the company reported a net loss of -$406 million and the firm has really not seen consistent earnings for three years. But hold on to your hats just for a second, because the most important profitability measure, in fact the very definition of a stock price is not net income. It's free cash flow. In our next chart we plot Net Income (TTM US$ Millions) in the blue bars.


Click Here to Interact With This Chart

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Levered Free Cash Flow (TTM US$ Millions)	3,860	2,525	798	RISING

Levered Free Cash Flow (TTM US$ Millions) is the critical determinant of stock price since market cap (stock price) is the present value of all future free cash flows. For AMZN the metric is rising, up nearly 53% year-over-year and now stands at an all-time high of $3.86 billion in the trailing-twelve-months. Let us finally do away with the ridiculous narrative that AMZN is somehow going to run out of money or can’t "make money." That’s just not the case, and it’s not the case by a lot.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time.



Click Here to Interact With This Chart

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Research and Development (US$ Millions)	2,754	1,991	1,383

Research and Development (US$ Millions) is trending higher meaning that for at least five consecutive quarters, it's been rising. In reality, it's been rising for about 30 consecutive quarters. R&D stands at over $2.7 billion in the last quarter, up 38% in the last year and up an incredible 99% in the last two-years. Even further, Amazon's selling, general and administrative (SG&A) expense is also exploding and now stands at just under $4.3 billion. Together, those two expenses accounted for about $7 billion in expense last quarter.

It’s simply astonishing that AMZN spends more on R&D than all but three technology companies. That expense (along with Selling, General & Administrative expense (SG&A)) is exploding but appears to be actually doing something for the firm (beyond killing the bottom line). The expense is turning into an investment, and that investment is starting to generate returns.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and SG&A in the gold line.


Click Here to Interact With This Chart

Summary
Amazon has turned the corner and the greatest risk to equity appreciation is not the company’s execution but rather a systematic market correction. A descending tide sinks all boats and that risk is not trivial. The bull or bear argument for AMZN is clear cut. It's simply an argument about whether the firm can continue to do "all things consumer" and turn that free cash flow and revenue explosion into bottom line earnings.

As of right now, regardless of earnings, AMZN is likely the most feared technology company other than Facebook (FB) in that it can enter any market at any time and grab massive market share very quickly without concern for earnings. It has a diversified revenue stream from its own produced hardware (Kindle, Fire TV Sticks) to cloud computing (AWS), to prime subscriptions and streaming video (which will be a competitive force against Netflix (NFLX)), and of course to on-line retailing.

Down the road, we already know that Amazon has submitted a patent application for its drones. The FAA has already granted experimental testing permits to Amazon. As CNN so aptly put it, "Delivering packages wherever you want it, through the air, via drone in just 30 minutes -- that's Amazon's vision and the company just made another step forward. [Beyond homes], there's even mention of drone deliveries to boats." Friends, that's downright frightening to any other technology company and beyond. That's downright dangerous.

If you believe the expenses are turning into assets and that "Prime Day" was a window into the power of all things Amazon, then you believe the bullish thesis. If you don’t, you believe the bearish thesis. That’s just as simple as it gets.