Amazon.com Inc.

Fundamentals  

Amazon stock is up 27% in the last three-months and 116% in the last year. But what's going on behind the scenes at Amazon is beyond breathtaking, to outright dangerous and threatening to the rest of technology and borders on "impossible?". As of right now, AMZN is likely the most feared technology company other than Facebook (FB) in that it can enter any market at any time and grab market share quickly without concern for earnings.

I'm going to show you impossible, but here's a hint of what's below below, and it isn't even scratching the surface.

"Expect your Amazon deliveries within 30 minutes via drones"

What's Going On
In the latest earnings report on October 22nd, the company crushed every possible measure of profitability. Revenue hit $25.4 billion versus estimates of $24.9 billion. Here's the ridiculous all-time revenue chart for AMZN:

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That's actually a real chart, not some made up pattern. For the first time ever, AMZN broke $100 billion in revenue for a trailing-twelve-month (TTM) period. Revenue (TTM) was up 18% year-over-year, 23% year-over-year on a quarterly basis and a staggering 43.4% over the last two-years (TTM). Further, operating income rose to $406 million from a loss of $544 million last year.

EPS came in at $0.17 versus estimates of a loss of $0.17, and that's up from a loss of $0.95 per share in the year ago period. As we will see below, Amazon's massive improvements came from the 50%+ growth in Amazon Web Services and a ridiculous growth in Prime users.

Here's the incredible one-year stock chart.

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Retail
As retail sales in the US putter along at a 1.7% growth-year-over-year, Amazon revenue is growing several times that level and it's growing its market share impossibly large at an impossibly fast pace.

Amazon's North American gross merchandise volume has captured 36% of all retail growth this year through September, estimates Wells Fargo analyst Matt Nemer, excluding vehicles, fuel and food/beverages. That's up from 29% in Q4 2014.
(Source: IBD).

So, as Sears, Target, Macy's and Wal-Mart struggle with either closing stores or shrinking earnings, Amazon is booming.

Prime
Amazon Prime (and AWS) is simply the future for this company and memberships continue to grow at 50%. Wells Fargo analyst said about Amazon Prime:

If I had to isolate one (reason for faster growth), it's the adoption of Prime and utilization of Prime,
(Source: IBD).

An RBC survey in September revealed that 40% of Amazon might be Prime members. That's 60-80 million people paying $100 a year or $6 billion to $8 billion in membership fees alone. Better yet, that same survey reported that 75% of Prime members said they bought more from Amazon after joining Prime. About half the Prime members said that they spend $800 or more a year at Amazon, vs. 16% for non-Prime customers (Source: IBD).

The Prime streaming video service is now a legitimate competitor to Netflix.

Remember Prime Day?
Amazon's first "Prime Day" on July 15th, 20015, was a special sales event for prime only subscribers ($99 a year) and it was a colossal success. Worldwide order growth increased 266% over the same day last year and 18% more than Black Friday 2014. A Washington Post headline might do it the most justice when it simply read, "While you were making Prime Day jokes, Amazon was laughing all the way to the bank." "Prime Day" was not just a success, it was the greatest single accomplishment by any technology firm that lives in the on-line sales realm, ever.

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Cloud (AWS)
While Prime is incredible, I think an equally strong argument could be made that AWS is the greatest single driver for Amazon right now.

Amazon Web Services (AWS) generated $2.1 billion in quarterly revenue which was 78% year-over-year growth. The business has immensely high margins compared to retail; that revenue led to $521 million in operating income. While AWS was just 8% of revenue, it made up over 52% of profit.

Basically, the cloud made the quarter. AWS generated almost as much operating income as Amazon's entire North America e-commerce business.
(Source: ZACKS).

And just so we fully grasp the bullish scenario here, AWS is a baby business -- the firm just started announcing results for it as a separate segment in the first quarter of this year. This isn't a "toppy" business aging, it's a brand new business growing huge.

Margins
BothPrime and AWS generate substantially higher margins than normal retail operations and the impact is starting to become absurd. Here is a chart of Amazon's all-time gross margin %.

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Four years ago AMZN was generating 22% gross margins and couldn't turn a profit. As of last quarter the company reported over $32% gross margins, or a nearly 50% improvement.

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More
OK, I promised you "impossible" and here it is.

The BusinessInsider reported that Amazon may be 'secretly' working on a team that will help it replace FedEx and UPS. The goal here is simple, lower reliance on third party shippers. But this is where we start to get absurd again. Read this:



Are you kidding me? How many people will sign-up for a Prime membership if delivery is measured in minutes? But it gets better.

Amazon is already testing "Prime Now" which is a service that would offer delivery in under 60 minutes. If that sounds ridiculous, try this: The company has already launched it in 17 cities, including San Francisco. Yeah, it's actually happening. Amazon now has 173 logistics facilities worldwide.

Why Does this Matter?
Prime becomes a better value proposition for Prime. margins will increase. But, how about this: Amazon will turn into a powerhouse transportation logisitics company. That fancy sentence means the company has a new business line if it wants it -- to deliver faster than any company ever, more efficiently than any company ever, and you may (n the near future) throw away your fedEx and UPS accounts for all things, not just Amazon.

More, more
And more "impossible."

Amazon has submitted a patent application for its drones. The FAA has granted experimental testing permits to the firm. 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. That's downright innovative.

Home Grown Technology
Amazon Fire is a digital media player and microconsole. Fox Businessreports that Fire is the best-selling product on Amazon.com since launch, and based on the strength of the customer response, the company is building millions more than was already planned.

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Conclusion
Amazon's revenue is growing at breackneck speed even as the revenue base has grown to now over $100billioninthe last year. margins are growing as business lines Prime and AWS are seeing growth rates in the 50%+ range -- we're talking small cap growth for a mega cap company in segments that drive essentially all of the profitability.

The company is going to break transportation logistics in half with its delivery services that will be measured in minutes rather than days. All of this growth is happening as the firm's balance sheet is strengthening, now showing over $14 billion in cash and equivalents, up nearly half a billion from the quarter before. Inventories rose slightly, but inventory turns are still at a very healthy 7.5x.

Note: Amazon's stock price has been on an absolute tear. Be mindful of valuations.

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