Why Investors Love Amazon.com (Nasdaq: AMZN) Stock

Amazon.com (Nasdaq: AMZN) reported earnings after Thursday's closing bell that missed estimates and initially disappointed investors.

The company reported earnings per share for the quarter ended June 30 of $7 million, or a penny a share, on revenue of $12.83 billion. Analysts had expected EPS of two cents a share on revenue of $12.92 billion.

Amazon.com's Q2 numbers compared with earnings of $191 million, or 41 cents a share, on $9.9 billion in sales during the same period a year ago.

For Amazon.com this was a 96% drop in its second-quarter earnings from a year earlier. The company also forecast a third-quarter operating loss between $50 million and $350 million.

Amazon stock immediately fell about 7% in after-hours trading and appeared to be setting up for abysmal numbers today (Friday).

Fortunately for Amazon shareholders, the stock reversed course and soared to a 10-month high. AMZN closed up 7.87% at $237.32.

Why the turnaround?

Here's what smart investors were able to see when they looked at the numbers.

A Closer Look at Amazon.com (Nasdaq: AMZN) Earnings

Even though profits were much lower than the same period a year ago, the company's gross profit margin, a closely watched measure of profitability, topped 26% in the second quarter - the highest level in at least nine years.

Money Morning's Chief Investment Strategist Keith Fitz-Gerald explained that what's really behind Amazon.com's huge profit drop is CEO Jeff Bezos doing some smart spending.

"I love it," Fitz-Gerald told Fox Business' "Varney & Co." host Stuart Varney when he joined the program Friday. "Bezos goes on the warpath and he says, "You know what? I'm going to spend right through this, I'm going to get into cloud computing, I'm going to do things on my technology, I'm going to make it easier, faster and better for my customer to get what they want,' - and the market rewards him."

Rather than sitting on its tremendous cash pile like other tech companies, cutting costs and dishing out layoffs, Amazon.com is investing in its future.

"That speaks to something we've talked about frequently," said Fitz-Gerald. "When the going gets tough you want to shift to those stocks that are involved in products, services and segments that customers need as opposed to just want. I would submit that Amazon is not really a merchandising company, it's a tech company and people need it now. It's not just a want anymore."

Amazon.com's product revenue, which includes the traditional online retail segment, grew 25% to $10.79 billion. Services revenue, which includes its cloud computing business Amazon Web Services, surged 57% to $2.04 billion.

Indeed, Amazon.com has been putting cash toward the services it sees bringing in the most money down the road - which will take the company a long way from simply being the biggest holiday shopping site.

"They're going to spend to build the infrastructure and capacity to deliver the products and services that they feel the consumer wants," Needham and Co analyst Kerry Rice told Reuters.

Is Tech the Best Bet?

But just because Amazon.com is finding success in the tech space doesn't mean it's time to scoop up everyone on the Nasdaq.

Varney asked Fitz-Gerald if there was a sector performing better than tech - especially during uncertain economic times like these.

Fitz-Gerald said he has encouraged investors to consider buying "sin stocks," a logical move that offers some extremely attractive stocks. He even named one company he likes that has generated 5%-7% returns year after year while paying a solid 4.5% dividend.

You can watch the accompanying video for that recession-proof profit play.

The interview also included Fitz-Gerald's response to comments made by the White House, or "Ministry of Whitewash" as he likes to call it, regarding the latest GDP numbers. The U.S. economy grew by 1.5% in the second quarter - down from the previous quarter, but higher than expected.

The government said the economy is moving "in the right direction," but Fitz-Gerald warned investors not to get excited about any economic news out of Washington.

Fitz-Gerald called the White House's notion that the economy is moving in the right a direction a "tremendous injustice to the American people trapped inside this mess."

Check out the video for Fitz-Gerald's full comments on Amazon.com (Nasdaq: AMZN), the U.S. economic problems, and the sin stock investors should consider.

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