Amazon: The ultimate good-faith stock

By Kevin Kelleher, contributor

FORTUNE — No matter how much research is done before an investment, there always remains a little bit of faith when it comes time to place a trade. People may mock analysts when their forecasts are off, but the analysts who aren’t pressured by their firms to dress up estimates — which is a lot of them — still miss the mark sometimes. Research only takes you so far. After that it’s only guesswork.

Few stocks involve more guessing than Amazon (AMZN). The company is tightfisted when it comes to disclosing data or metrics. How many Kindles has Amazon sold? The company won’t say. It discloses holiday shipments, but only on the peak day and not for the entire season. Amazon Web services will make an estimated $3.8 billion in revenues a year, but the company won’t break it out as its own category, lumping it in with “other revenue” where it’s been for years. Figuring out the division’s profit margins is even more of a challenge.

When it comes to guidance, Amazon does offer it (while others like Facebook (FB) have been mute on guidance in recent quarters), but it usually offers a range you could drive a UPS truck through. Will Amazon post an operating profit or a loss this quarter? Yes. According to the company, the figure will land somewhere between a loss of $340 million to a profit of $10 million. That’s a dartboard any monkey could hit.

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The lack of clarity leaves investors who rely on fundamentals with an uneasy choice: either don’t invest in Amazon’s stock or simply trust the management that it will manage things well. Those who’ve opted for the latter have done pretty well for themselves. Amazon’s stock is up 234% over the past five years, while the S&P 500 (SPX) is up 15%.

Amazon asks investors to trust its management in other ways. It has never paid a dividend, asserting that, “We intend to retain all future earnings to finance future growth.” That also means Amazon consistently has thin profit margins and sometimes slips into a loss when it’s spending heavily on that future growth. But it’s earned trust because it has so consistently delivered on growth in revenue.

But it can sometimes put Amazon bulls in an awkward position. The company has always stressed free cash flow as the key financial metric to measure its health, instead of the earnings per share that is the standard gauge for many investors. Free cash flow is basically the cash the business is generating beyond the spending needed to keep growing. Amazon feels it’s a better measure of whether Amazon’s strategy of returning profits to customers (and not investors) is succeeding.

The problem is, the growth in Amazon’s free cash flow over the past 12 months fell to $177 million, an 85% drop from the comparable period a year earlier. That’s primarily because Amazon paid $1.4 billion for new offices in Seattle. But free cash flow is slowing at the same time revenue growth is: Revenues in the last quarter grew 1% on year, down from 5% in the previous quarter and 12% in the year-ago quarter.

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Where Amazon is gaining is in another financial metric favored by its investors: gross margin, which grew to to 25.6% from 24% a year earlier. That means Amazon’s revenue is growing faster than its core operating costs, and that previous spending appears to be paying off.

But which is it? Are rising gross margins signs that Amazon is thriving? Or are declining revenues and free cash flow signaling that it’s hitting some headwinds? Unsurprisingly, the bulls are pointing to the former, and the bears are pointing to the latter. So Amazon remains one of the most divisive stocks in the tech sector.

Amazon is spending aggressively to expand in Europe as well as Asia, where it faces a formidable competitor in Alibaba. It’s investing in original TV programming to compete against Netflix (NFLX) and Hulu. And it’s adding to Prime benefits to reward customer loyalty. All of these plans are sound and could lead to stronger growth in coming years.

Amazon’s stock has declined 6% since it reported its earnings, suggesting the bears have a stronger case for now. A little more clarity in how its business is working would help alleviate those fears and reward investors, if not with dividends or high net profit margins, then with more data to help them justify their good faith in the company.

Amazon may be heading into a period of slower revenue growth and higher capital spending. Nonetheless, the company’s believers are sticking with the stock, remembering that it’s never paid for very long to underestimate Jeff Bezos.

Kevin Kelleher is a writer covering finance and technology in the San Francisco Bay Area.

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