PREVIEW-Forget price, Amazon growth fuels the bulls

* Amazon reports Q3 results on Thursday

* Investors ignore price, see long-term gains

* Apple’s iPad, Wal-Mart price war didn’t dent stock

By Alexandria Sage

SAN FRANCISCO, Oct 20 (BestGrowthStock) – It’s not just death and
taxes that are certainties in life. Add Amazon.com’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: http://link.reuters.com/juc78p

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.

TOO HIGH?

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)

PREVIEW-Forget price, Amazon growth fuels the bulls