Ever since the launch of the Kindle Fire late last year, Wall Street has been buzzing with speculation about whether Amazon (NASDAQ:AMZN) could become a serious contender in the tablet market.
Amid litigation over e-book pricing and increased competition, Amazon announced a high-profile acquisition of 62-year-old Avalon Books publishing company. Could this be the push Amazon needs to become a threat to the iPad?
Let’s find out.
Company Overview
We all know Amazon.This is the biggest online retailer out there and you can buy just about anything you can think of and have it delivered to your home in just a few days.
Industry Breakdown
There are currently 24 companies in the Catalog & Mail Order Houses, the largest player being Amazon. Amazon also ranks at the top in terms of Price/Earnings to Growth ratio and boasts the second-highest sales growth and fourth-highest long term growth rate.
In terms of return on equity, Amazon ranks at sixth and it is eighth in terms of earnings growth. Amazon’s main competitors are Apple (NASDAQ:AAPL) and Barnes & Noble (NYSE:BKS). Of these three companies, Amazon has the second-highest sales growth and operating margin but the lowest gross margin.
Acquisition Buzz
After the closing bell on Tuesday, management announced that Amazon has bought out Avalon Books, a traditional publisher known for its hardcover romances, mysteries and westerns. Through this buyout, Amazon will acquire publication rights to over 3,000 backlisted titles and will work over the next several months to secure eBook amendments for books whose digital rights are not currently owned by Avalon.
This acquisition comes on the heels of the company’s recent purchase of the rights to publish over a dozen James Bond books as well as 450 kid-friendly titles from Marshall Cavendish Children’s Books. Partially thanks to this aggressive expansion of digital rights, Amazon’s Kindle Fire now enjoys 60% market share in e-readers. With its attractive price tag and expanding digital library, researchers expect the Kindle Fire to capture more of the growing e-reader market, which is expected to sell 28 million units in 2013.
Current Ratings
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past year, this stock has spent most of its time in buy territory, but towards the end of 2011 and the beginning of 2012, AMZN spent some time at a C-rated hold.
What’s interesting about Amazon is that the one thing keeping it from being a hold is its solid level of buying pressure. On the fundamentals side, there’s still plenty of room for improvement, especially in terms of operating margin growth, earnings growth, analyst earnings revisions and cash flow.
Amazon is doing well in terms of sales growth and its track record of beating earnings surprises. AMZN receives a C for its Fundamental Grade and a B for its Quantitative Grade (which indicates the current level of buying pressure).
Bottom Line
Right now, AMZN is a buy. However, if you hold this stock I recommend that you keep a close eye on buying pressure, which could easily send this stock into hold territory.
Recommendation: B-rated Buy
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