Forget price, Amazon growth fuels the bulls

By Alexandria Sage

SAN FRANCISCO (BestGrowthStock) – It’s not just death and taxes that are certainties in life. Add’s

Investors eyeing Amazon, the world’s largest online retailer, have had to think twice when contemplating the company’s price-to-earnings ratio, which far exceeds those of rivals in technology and retail. Those who believed in its potential and bought shares a year ago are enjoying a 68 percent return today.

This week, Amazon will again make a case for its growth story even as it stares down fierce competition with the likes of Wal-Mart Stores Inc (WMT.N: ) on the retail side and Apple Inc (Read more about Apple stock future.) (AAPL.O: ) in its sale of digital media.

Wall Street expects Amazon to report on Thursday that sales more than tripled in its third quarter to $7.36 billion, jump-starting a holiday season the company is again expected to dominate.

“The company continues to operate well and does everything it’s supposed to do,” said RBC analyst Stephen Ju, who rates the company “outperform.” “It’s always been expensive.”

Amazon currently trades at 45.4 times estimated 2011 earnings, compared with a multiple of 14.6 for Apple, 12.2 for Wal-Mart and 14.4 for eBay Inc (EBAY.O: ). For a look at Amazon’s key data versus rivals, see:

Bullish investors point to Amazon’s double-digit revenue and growth prospects — from web services to apparel sales.

They also expect operating margins to improve over the long term with scale as Amazon adds new categories and customers. Analysts expect 2010 operating margins of 4.8 percent for the high-asset company.

“As the de facto leader in this space, we do think they’ll continue to take market share,” said Michael Koskuba, a fund manager at Victory Capital Management, whose $110 million large cap growth fund includes Amazon.

Although recent investments in fulfillment centers and new hires have crimped margins, investors have given the company a pass on that front, confident that spending will lead to future gains, many said.

“We think that companies like Amazon will continue to trade at premium multiples given the scarcity value surrounding companies able to grow top and bottom lines as significantly as they are,” added Koskuba.


That confidence may appear foolhardy to some, given the competitive pressures Amazon faces, from Wal-Mart’s online unit anxious to steal market share, to the popularity of Apple’s iPad, whose e-reader functions compete with Amazon’s Kindle.

And then there’s the price.

“It’s really hard to get your hands around the valuation,” said BGC Partners analyst Colin Gillis, who cited confusion over how much Amazon is making — or losing — on the Kindle, as well as mixed data over the health of consumer spending. Gillis rates the shares “sell.”

But a higher valuation is justified in Amazon’s case, argues Citigroup analyst Mark Mahaney, given its faster earnings growth than the overall market and its strong cash flow.

Currently, 21 out of 37 analysts polled by Thomson Reuters I/B/E/S have a “buy” or “strong buy” rating on Amazon, versus 14 who rate the company “hold.” Only two advocate selling.

Analysts expect Amazon to point to strong traffic trends in the third quarter, fueled by more products sold online, and new programs like “Amazon Mom,” which gives discounts to repeat customers and fosters loyalty.

Moreover, a lower price and wider distribution for the Kindle is expected to have increased momentum for device sales — although the company does not release Kindle data — and the number of external, “third party” retailers selling on Amazon is growing.

Mercent, which helps such retailers offer their wares on sites like Amazon, said that gross merchandise volume for its clients selling on Amazon rose by 42 percent in the quarter from year-ago levels.

Still, Amazon’s growth may have encouraged hedging. Since the end of the third quarter, Amazon’s short interest has risen by 53 percent to 4.7 percent of share float, according to Lazard Capital Market’s Colin Sebastian.

And naysayers point to Apple as a holding that gives them strong earnings and better margins than Amazon.

“You can find strong earnings growth in other areas of the tech sector without having to pay 45 times (2011) earnings,” said John Petrides of Advisors Capital Management.

“I don’t think anyone will doubt that Amazon is a great company and a great business model. No one disputes that. Just from an investment standpoint, how much will you pay?” he asked.

(Reporting by Alexandria Sage; Editing by Michele Gershberg and Steve Orlofsky)

Forget price, Amazon growth fuels the bulls