Kindle Fire buyers will get Premium free for a year and Amazon hopes to hook them on buying online and its media offerings. Amazon also sells the $79 Kindle e-reader for those interested only in reading books and magazines, available from its vast library. Amazon says it will have 12,000 items in its digital media library by year-end, including books, music, movies and TV programs. It has content-licensing agreements with Fox Broadcasting, Sony ( SNE), CBS ( CBS) and NBC Universal, to name a few of its resources, and last week it reached an agreement to add select Public Broadcasting Service programming. Amazon's Web site offers what is probably an unmatched online shopping experience, given its breadth of product categories, shopping suggestions based on a customer's prior purchases, product rankings based on a scalable list of criteria, buyers' objective product reviews, competition among vendors and shipping options. As a result, it now has a stranglehold on retail in general, posting 2010 revenue of $34 billion, 40% more than in the previous year. Sales are on pace to grow 44% this year, which would bring sales to $49 billion. And that's in a slow economy that has consumers tight with a buck. Amazon earned $2.53 per share in 2010, a 24% gain, after lifting earnings by 29% in 2009. In contrast, Wal-Mart posted sales of $421 billion in its most recent fiscal year, 3.4% over the prior year's sales, and its earnings were $4.18 per share, up 12%. Institutional investors, including mutual funds, own 71% of Amazon's shares, which have a market value of $105 billion. Capital World Investors, parent firm of the American Funds Growth Fund of America, is by far the biggest with 5.6%, and it has been steadily adding to its stake over the past two years. JPMorgan ( JPM) analysts said two weeks ago that "Amazon has built a highly defensible business that is well-positioned to take share of both online and offline commerce. We continue to like Amazon shares long-term and believe the company's investments are appropriate for driving continued share gains."
And Morningstar says that due to its low-cost operations, Amazon generates a return on capital exceeding 50%, which should create huge cash flow once its new initiatives gain traction. The company had a hefty $6.3 billion in cash on the books at the end of June, and relatively little in debt at about $300 million, which indicate a healthy balance sheet, one that could withstand a few bumps in the road. And there is one issue that threatens Amazon's well-oiled machine, and that's the prospect that cash-strapped state governments, egged on by brick-and-mortar retailers, will be able to slap a sales tax on online retailers. Several states had such legislative proposals and there may eventually be some national accord for a uniform state sales tax on the industry. But that's not necessarily a crippling blow, as Amazon has, and will continue, to diversify its products and services, if the past is prologue, and many in its customer base are likely to take a tax in stride. Amazon, scheduled to release third-quarter earnings on Oct. 25, is expected by analysts to report earnings of 24 cents per share on revenue of $10.9 billion. Its earnings for 2011 are expected to be $1.90 per share, and that will grow by 64% to $3.11 per share in 2012, according to TheStreet Ratings.