Investing in the World's Third Richest Man

Amazon's earnings puts Jeff Bezos ahead of Warren Buffett

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Amazon’s (AMZN, Financial) second quarter earnings were so good, it sent the stock northbound and carried Jeff Bezos, Amazon’s CEO who holds 18% of Amazon’s shares, to third place in the world’s richest list.

Amazon reported $1.78 earnings per share on quarterly revenues of $30.4 billion, while analysts were expecting the company to report $1.11 earnings per share on revenues of $29.5 billion. For a company with a reputation of spending more than they earn, the record-breaking numbers are great, but if you have been following Bezos for some time, you know that he will find a way to reinvest all that growth back into the company.

As has been the case with Amazon for a long time, net sales grew in all three segments, with North America, International and AWS growing 28%, 30% and 58% respectively.

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There aren’t many companies around the world that can boast 20%+ growth rates for the past several years, but that’s exactly what Amazon has done. Even if their sales growth slows down in North America, they now have the international segment to fall back on. If both these segments end up bringing nothing in the end, they still have Amazon Web Services to show profitability with. With each passing quarter, it's getting a little harder to find fault with this company.

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One significant take-away from Amazon’s earnings call is that North America segment’s operating margin has been steadily growing since the first quarter of 2015, from 1.9% to 4.0%. That should worry a lot of Amazon’s brick and mortar competitors, as this will provide a lot of strength for Amazon to keep expanding its services, which it is already doing at a breakneck pace.

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A similar trend is being repeated with AWS as well. Amazon is still the leader in the cloud computing segment, growing at an awe-inspiring 50%+ for the last two years. As competition heats up, it's normal to expect operating margins to fall so as to support the expanding user base and costs related to client acquisition, which normally go up in a competitive environment. But AWS, despite their fast growth, has managed to do the opposite - operating margins have gone from 12.4% in the first quarter of 2015 to 24.9% in the second quarter of 2016. This will allow the company tremendous pricing power, providing enough leeway to handle a pricing war. AWS is the highest operating income earner for Amazon and expanding margins in this division is great news for the company.

The Investment Angle

Although Amazon is a definite buy, you’re not going to get many opportunities to invest at a low price. With such stellar second quarter results, it’s going to be even harder finding the right entry point. Therefore, with such a high-growth stock with tremendous upside potential, one of the best ways is to use a dollar-cost averaging (DCA) approach.

The DCA method, for the uninitiated, involves investing a fixed amount every month or at every pre-defined time period. As the name suggests, this method allows you to take advantage of the law of averages and brings down your cost basis over time.

In a sense, it’s a simplified version of a systematic investment plan that works with high-growth companies with strong upside. Amazon fits that description to the tee, so this approach will work in your favor in the long run. In order to see some real gains, you will need to do this over a 2-3 year period or longer, but the return is well worth the patience.

Disclosure: I have no position in any of the stocks mentioned and no intention to initiate any position in the next 72 hours.

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