Amazon, Riding High, Has Hidden Risks

Amazon.com ( AMZN), a pioneer in electronic commerce whose stock has soared and soured more than the stock of most other tech firms, has a lot going for it.

The bookseller now offers everything from Apple ( AAPL) computers to exhaust systems for Harley-Davidson ( HOG) motorcycles. The latest version of Amazon's Kindle digital reader appears to be hit. And to serve those with less inclination to read, the company is taking dead aim to become the kingpin in the mega-profitable field of electronic gaming. Last week, Amazon said it's targeting the "trade-in" market dominated by GameStop ( GME).

But anyone interested in Amazon as an investment has to ask whether the stock is worth more than 10 times book value and 43 times this year's projected earnings. Apple's price-to-earnings ratio is 15.6, Google's ( GOOG) is 18.4. Even the best performer on the S&P 500 index in the past 12 months, Family Dollar ( FDO), is selling for 17.4 times earnings.

While Amazon's revenue jumped 29.8% last year, when the current recession already was taking hold, analysts' consensus is that growth in net income will slip to $1.48 a share for fiscal 2009 from $1.49 in fiscal 2008. As economic growth probably will resume next year, analysts predict the online merchant's earnings will grow 29.7% in 2010, as can be seen in the accompanying statistical profile below.

Although Amazon's Kindle reader is gaining attention as a fashionable tech accessory, there's little in the firm's business model that could be mistaken for rocket science. Despite the company's attempt to protect some of its online retailing procedures with controversial patents, few real barriers exist to prevent competitors from entering its online retailing domain.

Amazon dwarfs Internet retailers such as Overstock.com ( OSTK) -- $19.2 billion in annual revenue versus $834.4 million. But taking online marketing very seriously are "bricks and mortar" giants such as the $375.4 billion revenue Wal-Mart ( WMT), $72.5 billion Costco ( COST) and $40 billion Best Buy ( BBY).

It has been a wild ride for long-term holders of Amazon stock. Its shares topped $106 in late 1999, during the tech bubble, before changing hands below $6 in September 2001. The shares stormed back to more than $100 in late 2007 and then drifted into the $30s last year before recovering to their recent range in the mid-$60s.

The stock's volatility is a factor in Amazon's "risk grade" of D-plus from TheStreet.com Ratings. Factors such as its valuation metrics, current financial position and consensus earnings growth estimates are weighed by TheStreet.com Ratings quantitative evaluation model in determining an "overall grade" of B-minus, equating with a soft "buy" recommendation.

AMAZON: 'BUY' BUT WITH SOME RISK
Company
AMAZON.COM INC
Ticker
AMZN
Industry
Internet & Catalog Retail
TheStreet.com Ratings Reward Grade
A-
TheStreet.com Ratings Risk Grade
D+
TheStreet.com Ratings Overall Grade
B-
TheStreet.com Ratings Recommendation
Buy
Recent price
64.79
Market Cap ($Mil.)
27,767.9
Total Assets ($Mil.)
8,314.0
Total Debt ($Mil.)
664.0
Latest Fisc. Yr. Revenue ($Mil.)
19,166.0
Cash Flow from Operations ($Mil.)
1,697.0
Earnings Before Interest & Taxes ($Mil.)
789.0
EPS - Latest Fiscal Year
1.49
EPS - Curr. Year Consensus
1.48
EPS - Next Yr. Consensus
1.92
Price/Book Ratio
10.4x
Ret'n on Equity (%)
24.1
P/E - Current Year
43.8x
P/E - Next Year
33.7x
Dividend Yield (%)
0.00
Source: TheStreet.com Ratings (Data as of 2/27/2009)
For an explanation of our ratings, click here

Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.

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