Amazon: Bloated, but Still Solid

by Marc Bastow | April 7, 2012 8:00 am

Amazon: Bloated, but Still Solid

amazon box 630 300x225 Amazon: Bloated, but Still Solid[1]It’s getting harder for investors to understand what’s happening at Amazon (NASDAQ:AMZN[2]) — and in the process try to decide how to play this king of the e-tailing hill.

The world’s largest Internet retailer’s stock is cloud-bound, hovering near $200 per share and trading at a dizzying 140 times trailing earnings. And the higher you go, the denser the clouds become.

So what are investors here on terra firma supposed to do? Let’s take a look at the company.

First the bad news:

Amazon missed its earnings and profit projections last quarter, as the traditionally strong Christmas season didn’t pan out as planned. AMZN also announced that for the current quarter, while net sales may increase between 22% to 36% over Q1 2011, it expects operating results to range from a loss of $200 million to a profit of $100 million.

In short, Amazon is running on the high side of cost against a slower revenue base. That can be a bit of a problem when you’re trying to right-size the business against a moving target.

And Amazon is in a business where moving targets abound.

The new Kindle Fire, unveiled in the fourth quarter, is already a hit, garnering 14% of the tablet market [3]share. A sweet $200 entry price, along with a seemingly unlimited amount of content, should keep interest hot for some time. Expect Amazon to continue upgrading the device, allowing for consumers to get more and more content.

However, competition abounds. Google (NASDAQ:GOOG[4]) plans on introducing a tablet later this year, and of course the all-powerful Colossus of Cupertino, Apple (NASDAQ:AAPL[5]), is the entrenched leader of the tablet pack. Amazon also has to fend off plucky Internet bookseller Barnes & Noble (NYSE:BKS[6]) and its Nook offering.

Still, Apple’s tablets might provide more functions, but they also cost at least double a Kindle. And B&N’s Nook is way behind in availability of content.

Amazon also is dipping a toe — no, make that a foot — into the daily-deals space occupied by Groupon (NASDAQ:GRPN[7]), LivingSocial and others, recently running a coupon program directly through its own daily-deal site, AmazonLocal. The program sold more than 1 million vouchers[8] before the end of the day, adding new subscribers to the Amazon database.

Clearly, Amazon is serious about the expanding its e-commerce empire. Given the time, resources, its database and economies of scale that might actually generate profits for the platform, AmazonLocal can become a major competitor to these relative upstarts, both of whom have some growing problems[9] of their own.

Why did Amazon go out and buy robotics maker Kiva Systems for $775 million? When you open and operate as many fulfillment centers as Amazon, there better be a better way to handle the merchandise coming off the shelves. Amazon spent $4.6 billion on warehouses last year, the company’s largest operating expense.

Kiva’s robotics will be integrated into the 69 (and growing) centers, making them more efficient, improving productivity and lowering labor costs. That’s thinking ahead.

The bottom line is that, to a great extent, some of the cautious news is already baked into the stock price. Despite getting closer to the $200 threshold, the stock is well below its October peak around $247. And the market has been amply warned about sales and profits, so unless the company truly understates the case, panic won’t be in the air.

It’s difficult to say now is the best time to buy in, considering the sky-high valuation, but if you already hold AMZN, stick with it. Jeff Bezos might not be the most popular CEO on the planet — and some additional growing pains might be in store — but in the long run, Amazon looks like a strong winner no matter where it plays.

As of this writing, Marc Bastow was long AAPL.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/10/amazon-box-630.jpg
  2. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  3. garnering 14% of the tablet market : http://investorplace.com/2012/02/amazon-kindle-fire-to-get-hotter-amzn-aapl-bks/
  4. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  5. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  6. BKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKS
  7. GRPN: http://studio-5.financialcontent.com/investplace/quote?Symbol=GRPN
  8. sold more than 1 million vouchers: http://www.examiner.com/technology-in-national/amazonlocal-50-percent-off-gift-card-promotion-nets-5-million
  9. growing problems: http://investorplace.com/ipo-playbook/its-goof-on-at-groupon-again/

Source URL: http://investorplace.com/2012/04/amazon-still-a-solid-play-amzn-goog-aapl-bks-grpn/
Short URL: http://invstplc.com/1nByEft