Amazon Drops on Q2 Profit Miss - And Yet Sales Were Up 23%

Updated July 25, 2014: After closing up 0.13% on Thursday, Amazon stock(Nasdaq: AMZN) plummeted more than 7.5% after hours when it reported a miss on its Q2 2014 earnings.

We said to look for AMZN stock to keep tumbling, and it sure has. On Friday morning, shares were down 11.03% at 10 a.m. EDT.

We called it because the Seattle, Wash.-based retail giant has historically gained or lost 9.5% the day after its earnings release (which always takes place after market close), according to Bespoke research. Prior to yesterday, Amazon.com had beaten earnings per share (EPS) forecasts 56.4% in the last 10 years, according to CNBC. It had beaten revenue forecasts 66.8% of the time

Amazon posted a wider-than-expected second-quarter EPS loss of $0.27, missing analyst expectations by $0.12. This marks Amazon's biggest quarterly loss since 2012. However, it beat revenue expectations handily - its $19.34 billion was $20 million more than projected. A year ago in the same quarter, AMZN reported a $0.02 loss per share on revenue of $15.7 billion. That means Q2 2014 saw 23.3% higher revenue year-over-year.

That the company notched an EPS loss should come as no surprise - for many analysts, this is a number to ignore when it comes to Amazon.

"Amazon is not going to turn a profit. We already know that," Keith Bliss, senior vice president and director of sales & marketing at Cuttone & Co., said to IBTimes. The company hasn't done so since 2012.

Citigroup appeared more skeptical when it downgraded Amazon from "Buy" to "Neutral" on Tuesday.

"While we believe that the core retail business is performing well and posting solid revenue growth and bottom-line leverage, we believe earnings and the stock could remain under pressure during this period of aggressive investment in AWS [Amazon Web Services] as many investors have become frustrated by AMZN's lack of leverage (continued aggressive investment) and lack of transparency," Citigroup analyst Mark May wrote in a note to investors.

But our own Money Morning Chief Investment Strategist Keith Fitz-Gerald shared similar sentiments with Bliss earlier this year.

"I don't care whether Amazon misses, I just care that it's the company's status quo," he said. "With Amazon, I'll take anything but no big surprises - only if there's a big surprise would I be concerned."

Here are the top numbers to focus on from second-quarter Amazon earnings...

Amazon Stock Predictably Dropped Around 9.5% on These Numbers

What Bliss had his eye on was revenue growth.

"The metric that everybody looks for is their year-on-year revenue growth. Early channel checks suggested that they're going to have 24% to 25% year-on-year revenue growth, which is outstanding."

According to Bliss' metric, Thursday's 23% Q2 revenue bump means a win for Amazon and its investors.

But we can be more specific than just revenue growth.

Market research firm Trefis was expecting Amazon's momentum in the electronics and general merchandise segment to fuel revenue with a continuation of its 25% growth rate. Indeed, the segment posted a 26% gain consolidated year-over-year in Q2.

Trefis was also calling for "stellar growth" in web services, "driven by new product launches and continued adoption of existing products among clients." Web services includes Amazon's cloud infrastructure, which gives the company a competitive foothold into the corporate market. It's listed under "Other" in earnings, and had a consolidated year-over-year growth of 36% this quarter.

"[Amazon] launched a bunch of products to strengthen this segment during the second quarter of 2014," Trefis wrote earlier this week. "It introduced an SSD-backed storage service that saves money for customers without sacrificing on speed. The service is aimed at personal users and small/medium sized enterprises. While targeting large enterprises is important, there is a huge opportunity for Amazon to expand its cloud storage and computing business by going for smaller companies which tend to be more flexible. The retailer launched two more new products including new capability for mobile developers. In Q1 2014, Amazon's 'Other' segment revenues jumped by 58%. Most of the sales from this reported segment can be attributed to Amazon's web services."

Web services isn't Amazon's only segment pumping out product in 2014.

So far this year, the company has already released a set top box, a wand for shopping with Amazon Pantry, a new, unlimited e-book subscription, and its own music streaming product. And today, Amazon will launch the Fire Phone, its first foray into smartphones. It connects simply and directly with Amazon's library of wares - videos, books, music, and apps - and it's the easiest way to buy merchandise from Amazon.com.

"We continue working hard on making the Amazon customer experience better and better," chief executive officer Jeff Bezos said at earnings release today. "We've recently introduced Sunday delivery coverage to 25% of the U.S. population, launched European cross-border Two-Day Delivery for Prime, launched Prime Music with over one million songs, created three original kids TV series, added world-class parental controls to Fire TV with FreeTime, and launched Kindle Unlimited, an eBook subscription service. For our AWS customers we launched Amazon Zocalo, T2 instances, an SSD-backed EBS volume, Amazon Cognito, Amazon Mobile Analytics, and the AWS Mobile SDK, and we substantially reduced prices. And today customers all over the U.S. will begin receiving their new Fire phones - including Firefly, Dynamic Perspective, and one full year of Prime - we can't wait to get them in customers' hands."

Money Morning Defense & Tech Specialist Michael A. Robinson is a fan of Amazon's resourcefulness and product growth.

"These guys leave no stones unturned for the next dollar they can bring in," Robinson said earlier this year. "Amazon is constantly upselling, cross-selling, and looking for new products, and they're great at it. Once this franchise is built out, there are billions of dollars in cash flow that will fall to the bottom line."

Lastly, if you expected a profit loss and revenue growth in Amazon's earnings, there's still one number that might surprise you - take a look at operating loss. It was $15 million in Q2, versus an operating income of $79 million in Q2 2013. Net loss was $126 million. And the operating loss guidance for the next quarter is between $410 million and $810 million, versus only $25 million a year ago in the same quarter.

You see, Amazon plans to spend more than $100 million on original video content in the third-quarter, according to chief financial officer Tom Szkutak on the earnings call Thursday evening.

As for how to play Amazon stock right now, stay focused on revenue and growth, and don't let the lack of profits shake you - just be cautious.

"Amazon is so rich compared to its earnings. I think it won't go away anytime soon, and it's going to change the world - but it makes you think twice about investing, because if the company does ever take a hit, it's the investors that would bear the brunt of it," Fitz-Gerald said.

Where do you think Amazon stock is headed in coming months? Leave us a comment on Money Morning's Facebook page. Also, you can join us on Twitter by following @moneymorning.

Finding a great "safety play" is a good idea for investors in case U.S. stocks begin to sputter - or even stall. And this "20% catalyst" Money Morning's Executive Editor Bill Patalon has found could send shares of this company soaring...

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