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Wednesday, August 8, 2012

Amazon a Good Investment? Let's Look at Some Indicators

Amazon's Low Operating Earnings Tell
A Story
For background RE this post please refer to my 7/27/12 post Amazon: Exploding Revenue, Tiny Profit on my Publishing/Writing: Insights, News, Intrigue Blog.

Amazon has been reinvesting 99% of its revenues in expansion of its online businesses, striving for 'empirehood' in all related venues as any new technology surfaces --- This leaves only 1% as operating profit.

This strategy is probably fine in some instances if carried out in thoughtful, well funded and measured steps. But, to play this game consistently over too long a period (driven by constant and immediate changing tech) can lead to overindulgence, over indebtedness and eventually arrive at a saturation point where they find they have 'bitten off more than they can chew.'

So, when they do want to keep more revenues as profit they can't as it is gobbled up in operating costs for their diverse ventures.

Some needed financial definitions can be found here: What Is the Difference Between Net Revenue & Operating Income? and What Is the Difference Between Retained Earnings and Net Income?

Jack Hough, columnist at SmartMoney.com, gives insight to Amazon's present and future growth and other financials in this article for The Wall Street Journal:
Amazon Might Not Be the Growth Engine Investors Think 

Just over a week ago, the online retailer Amazon.com AMZN -0.92%reported a 96% drop in second-quarter earnings and said it would miss Wall Street's forecast and lose money in its third quarter.

News like that can send a stock sliding, but Amazon has since gained 6.8%. Investors seem impressed with its 29% quarterly revenue growth and willing to wait for earnings to come around.

Perhaps they're being too patient.

Fifteen years after Amazon's stock-market debut, it still carries the astronomical valuation of some start-ups: more than 200 times this year's earnings forecast, versus 14 for the Standard & Poor's 500-stock index.

U.S. investors have a long history of bidding up shares of companies they are familiar with. Back in the 1980s, Fidelity Investments fund manager Peter Lynch encouraged people to "buy what you know."

Plenty of investors seem to know—and like—Amazon. About one-third of its shares are held by ordinary, noninstitutional investors—nearly double the rate for the median company in the Standard & Poor's 500-stock index, according to data from Thomson Reuters. Among 41 Wall Street analysts who cover the stock, only one recommends investors sell it.

The bull case for Amazon shares is that earnings are depressed because the company is spending to improve its services, and that earnings will multiply in coming years as that spending bears fruit and winds down.

Amazon's earnings are indeed likely to jump, but that expectation seems priced in and then some, making now a good time for shareholders to take profits.

Seattle-based Amazon is best known for its vast online store, which competes with discount retailers like Wal-Mart Stores WMT +0.98%. But Amazon is as much a technology company as a retailer.

It collects fees from other merchants that sell through its site, similar to eBay EBAY -1.47%. It also rents computing power to customers who want to run networks without the hardware investment, a business Hewlett-Packard HP -0.52%recently entered. And its Kindle reader and online video streaming put it in competition with Apple AAPL -0.17%and Netflix.

Yet in terms of financial performance, Amazon lately has been a mirror image of most S&P 500 companies. Profit margins for the broad market are near record highs, but revenue growth has slowed to a crawl.

Read and learn more 

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