On Thursday, online retailer Amazon.com (click ticker for report: AMZN) reported mixed second quarter results. On one hand, we liked that revenue expanded 29% in the quarter (32% excluding currency), but on the other hand, we thought profitability and cash-flow generation were extremely weak. Specifically, operating income dropped roughly in half, while net income came in at just $7 million (a penny per share), which compares to $0.41 per share in the same quarter a year ago. Operating cash flow nudged a bit higher from last year’s quarter, but free cash flow fell 40% from the year-ago period. The company noted that Amazon Prime is “now the best bargain in the history of shopping” and that the Kindle Fire remains the #1 best-selling product across the millions of items available on Amazon.com since launch. The company expects third-quarter revenue to grow between 19% and 31%, and its operating loss for the period to be between $350 million and $50 million. We continue to be concerned with Amazon’s inability to translate tremendous revenue expansion into profitable growth. We’re also growing concerned that free cash flow trends are moving in the wrong direction. Still, we’re sticking with our fair value estimate range and maintain our opinion that shares are fairly valued. We’re not compelled to own Amazon’s shares at today’s levels.
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