Amazon.com (NASDAQ: AMZN) reported its second quarter results and they were superb. For the second consecutive quarter, the leverage in its business model is finally kicking in to high gear. One of my fellow BloggingStocks contributors, Kevin Kelly, has suggested that perhaps the short-sellers, who have gotten killed in this name, may have propelled this stock very high, very quickly in covering those short positions. He postulates that Amazon's stock may come back down once the short-covering dust settles. He may be partially right, but there is more to this story than meets the eye.
Amazon has been what Wall Streeters call a "stalled-story." That means the company took most of 2004-2006 to build very expensive infrastructure and spent heavily on heavy marketing expenses to acquire customers. This spending spree took the winds out of Amazon's sails for those three years. Earnings growth, visibility and momentum suffered, as did the share price. These past two quarters, it all came together and shareholders were pleasantly surprised with great performance. Many analysts have moved their price targets up to $100 or more.
Amazon has also become an institutional portfolio manager's must-own stock. The institutional manager had Amazon under-weighted in his portfolio and after the March quarter results, went back to an equal-weight position. The managers were thrilled to see Amazon shoot up to the $70's from the $40's, but really wanted another quarter's results to cement the case. The case is cemented.
Institutional ownership will now soar for Amazon's stock. Big mutual funds are now loading up and over-weighting the shares in their portfolios. One I spoke with "needed" to add $96 million worth of stock to move it up to a full 2% position in his fund. Next week, he will add about $155 million more into Amazon to get it to an over-weight position. His actions are being replicated by hundreds of other portfolio managers world-wide.
Amazon has established itself as the premier online retailer. Period. Game, set and match. Institutions will continue to add shares as the year goes on. Sure, there is short-covering going on, but long buying is also happening at a robust rate. The long buying will last a lot longer than the short-covering cycle.
Amazon is a giant in the making.
Georges Yared is the CIO of Yared Investment Research.
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