Amazon reported disappointing results on Thursday, knocking almost 10% off the stock on Friday. I think the company still has a lot going for it, and that this reaction is overdone. Before I get into my reasoning on this, let me state a big disclaimer. I freely admit that I am talking my own book here. I own 15 shares of Amazon. I bought them below $200, so I have a lot of cushion here, and it is not that large a piece of my net worth. But I have not sold the shares, and have no plans to do so. But I thought you should know that I have an economic interest in this argument. Caveat lector.

I have seen a few explanations for the stock sell-off. Revenues were in line with expectations, but profitability was a bit light. Guidance was lower than ‘whisper’ expectations. The usual. But a bigger concern seems to be the fact that Amazon Web Services (AWS) revenues fared poorly, with revenue actually down from the prior quarter. I think this is the first sequential decline in revenue that AWS has ever seen. The AWS aspect of the results featured in much of the tech blog coverage of the results, with a good piece from GigaOm on the subject. Probably the best-stated bear case came from the Register, with their usual blend of tabloid meets solid analytical thinking.

The bear case holds that Amazon is now facing real competition in the public cloud. The Register is the only piece I saw that really explicilty connected the price cuts among AWS, Microsoft’s Azure and Google a couple months ago. This actually makes a lot of sense to me. There is clearly a price war taking place among public cloud vendors now. So it is not surprising to see this hit AWS’ numbers.

Nonetheless, I think this is one of those stereotypical “Wall Street is too short-term focused” problems. The investment case for Amazon is that they are disrupting pretty much everything. They have huge scale, and they are using that to bring down prices on many products and services. This punishes their less efficient competitors, and eventually Amazon should emerge with a very powerful position. The company is in investment mode today, but has its sites  on much greater pricing power further down the road. This is clearly true of the book business where they started. And it seems likely to be true of public cloud computing as well.

Back in December, I wrote about AWS’ cost structure. The conclusion of that post is that AWS is actually immensely profitable. The company has huge leeway to engage in a price war, even with someone as large as Microsoft or Google. In fact, I was starting to think that AWS was getting too expensive and risking turning customers away. Amazon is now cutting prices on AWS at just the moment when more companies than ever are looking to start using public cloud resources. I think this round of price cuts could go a long way to lowering the barrier to adoption, opening doors to a huge new customer base.

I find it very odd that a week or two ago, the blogosphere seemed convinced that Amazon was about to take over the world. Then one quarter of slowing numbers turns that perception on its ear. I do not think much has changed, and AWS will likely continue to grow at a tremendous pace.

Say what you will about the ruthlessness that rests behind this strategy, but if you are willing to accept that Amazon is in investment mode, then this week’s news is not that meaningful. For several years now, investors have accepted the fact that Amazon is not focused on profitability, because it has so much opportunity in front of it, the smarter strategy is to forego profits and grab all the land it can. That remains the case, and I think the company still has a long way to go.