On July 26, Amazon (NASDAQ:AMZN) reported better-than-expected earnings on the strength of its Kindle. Although net income was down 8%, expectations were low and Amazon beat them. Meanwhile, sales were up 51%, helped by strong Kindle sales. In a Reuters report, CEO Jeff Bezos said, “Low prices, expanding selection, fast delivery and innovation are driving the fastest growth we’ve seen in over a decade.”

But does this mean you should go out and buy Amazon stock? Here’s a reason to consider buying:

• Rapid growth and strong balance sheet. Amazon has been growing fast. Its $34.2 billion in revenues have soared at an average rate of 33.7% over the past five years, while its net income of $1.2 billion has roared up at a 56.9% annual rate during that period — yielding a slim 49% net profit margin. Its debt has declined at a 14.5% annual rate, from $1.2 billion (2006) to $641 million (2010), and its cash has grown quickly at 44.8% annual rate, from $2 billion (2006) to $8.8 billion (2010).

There are three reasons to stay away:

• It is under-earning its cost of capital. Amazon is earning less than its cost of capital and it’s getting worse. How so? It produced negative EVA momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In the first six months of 2011, Amazon’s EVA momentum was -1%, based on first six months’ 2010 annualized revenue of $27.4 billion, and EVA that fell from -$40 million annualizing the first six months of 2010 to -$414 million annualizing the first six months of 2011, using a 12% weighted average cost of capital.
• Mixed earnings reports. Amazon’s earnings reports have been a mixed bag. It has beaten expectations by slim margins in three of the past five quarters and earned below expectations in two of those quarters. In its most recent earnings report, it beat analysts’ expectations of 35 cents per share by 17%, earning 41 cents per share on revenue of $9.91 billion.
• It is expensive. Amazon’s price/earnings-to-growth ratio of 1.42 (where a PEG of 1.0 is considered fairly priced) means its stock price is rather expensive. It currently has a P/E of 88.76and is expected to grow 62.3% in 2012.

This is a company that does a great job running a low-margin, high-capital-intensity business. Investors are assigning it a too-high valuation. Until it finds a way to boost margins, that could continue to be problem for those thinking of buying its shares.

Peter Cohan has no financial interest in the securities mentioned.