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Amazon’s Legal Tightrope Act is Nothing Short of Miraculous

Online retail giant, Amazon (Nasdaq: AMZN), reported its quarterly earnings on Tuesday evening – and missed Wall Street’s estimates.

Analysts had called for profits to hit $0.61 per share, but instead, income fell by 33% to $201 million, or $0.44 per share, compared with the same period a year ago.

However, while investors are preoccupied with the earnings miss and what it means for Amazon’s future prospects, my colleague, Justin Fritz, says they should focus on the company’s uncanny ability to avoid patent lawsuits.

This important area has become a massive legal scrum for companies recently, yet you’ll hear precious little from Wall Street on the topic.

I’ll hand it over to Justin and let him explain what it means for Amazon – and for investors…

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There are enough ridiculous patent lawsuits in the technology sector lately to make Judge Judy’s caseload look like that of a Supreme Court justice.

According to Google (Nasdaq: GOOG): “The recent explosion in patent litigation is turning the world’s information highway into a toll road, forcing companies to spend millions and millions of dollars defending old, questionable patent claims and wasting resources that would be much better spent investing in new technologies for users and creating jobs.”

Apple (Nasdaq: AAPL) is the latest culprit. The company is suing Samsung over a number of violations related to operating system features. Apple’s main beef? That Samsung’s Galaxy S smartphone lineup mimics the iPhone’s form factor.

Give me a break.

Think of how many smartphones resemble the iPhone. Are phone makers supposed to create hexagonal phones from now on?

But Apple’s squabble represents only a fraction of the legal activity plaguing mobile tech right now.

Business is Booming for Patent Lawyers

As Technologizer says, “The most startling thing about the [Apple vs. Samsung] news may be that the two companies weren’t already in court with each other.”

In fact, to keep track of the flurry of patent lawsuits, the technology blog put together this handy chart, which covers major, mobile-related patent lawsuits.

While it’s not 100% complete, a quick glance shows you that lawsuits are racking up at warp speed:


Source: Technologizer

What didn’t surprise me is that Google’s only big legal contenders are Apple and Microsoft (Nasdaq: MSFT). After all, they have much to gain by kicking Google’s efforts down a notch.

What did shock me, however, is that no one is targeting Amazon – especially given all the toes it’s stepped on lately…

Amazon Walks the Legal Line

With Amazon’s recent move into the cloud-computing area, the company signaled its intent to diversify in a major way. It’s a bold move, too, given that some big players currently dominate the area – IBM (NYSE: IBM), AT&T (NYSE: T) and Hewlett-Packard (NYSE: HPQ).

That’s not all, either. It’s pushing some other big names around in other areas, too…

~ Music: When Amazon launched its new cloud music service, Cloud Drive, the company said it didn’t need permission from the music studios. But the music industry doesn’t agree. Sony (NYSE: SNE) claims, “We’re keeping all our legal options open,” with regard to Amazon.

~ Mobile Apps: Amazon also jumped into the Android mobile application domain in March – a move that surely riled up Google, particularly since some of Amazon’s Appstore features are superior to the native Android market. So far, however, Google has kept its cool.

~ Daily Deals: In December, Amazon invested $175 million into daily deals company, LivingSocial. I bet Microsoft didn’t take the news well, since it recently incorporated LivingSocial and Groupon into its Bing search engine.

It’s a miracle that Amazon hasn’t yet stepped into a legal firestorm. However, Apple is taking its trademarked “App Store” moniker seriously and has taken the issue with Amazon to a California court.

Plus, Google suffered a legal loss recently, being forced to shell out $5 million to Bedrock Computer Technologies in order to continue using the company’s technology in its data centers. Several other companies, including Amazon, have also been targeted.

In the scheme of things, though, these cases are minor, given the other tech giants that Amazon is toying with. So how does the company keep dodging the legal bullet?

Perhaps in the same way that its stock survived, despite a major meltdown of one of its core businesses last week. You see, last Thursday, a segment of Amazon Web Service’s (AWS) cloud-computing area crashed.

Thousands of companies run their websites by renting the Elastic Compute Cloud (EC2) server space. And when it crashed, it brought down about 70 sites, including The New York Times.

You’d think a hiccup of that magnitude would send investors running. Instead, Amazon shares rose by 1% to $185.89. It extended the company’s rally, which started on March 17 when shares traded at $160.97. That’s what I call resilience.

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Don’t Bet Against This Proven Performer

My thanks to Justin Fritz for that excellent report.

Investors realize that Amazon’s foray into these new markets isn’t a sign of recklessness. Nor is the company’s ability to avoid legal scrutiny based on dumb luck.

They know that Amazon’s innovation and strong business model can back it up every step of the way.

As Justin has said before, “Don’t bet against the company… or the stock.” Even after the latest earnings miss.

The reality is that Amazon’s business didn’t stumble one bit. In fact, the earnings report showed that year-over-year sales jumped by an impressive 38% to $9.86 billion. That beat the consensus analysts’ estimate of $9.54 billion. And year-over-year revenue growth has averaged a 40% gain over the past six quarters.

In fact, the only reason why Amazon’s profits slipped was because management decided to spend more this quarter to invest in future growth. Never a bad thing.

And given the company’s track record of success, it’s highly likely that those investments are going to pay off.

Ahead of the tape,

Louis Basenese