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Amazon's Setting Up to Reward Patience

A weak economy is giving investors an entry point on a stock that looks promising for the long term.

The volatile stock market and the tepid economy aren't particularly conducive to long-term perspectives.

Investors, if anything, put even more of an emphasis on short-term performance -- which makes

Amazon.com

(AMZN) - Get Amazon.com, Inc. Report

more of an odd man out in this market.

Amazon has always been, by design, a long-term performer -- an ugly duckling that was certain to grow into a magnificent swan if you just waited long enough.

It took years for Amazon to start posting a profit, but once it did, it never went back into the red. It's spent what some believe is way too much money on free shipping to win customer loyalty, but that loyalty is serving Amazon well so far into this downturn.

Now Amazon is at another point where short-term bears and long-term bulls are about to be at loggerheads.

Amazon's stock fell to $66 in July from $96 in January before a strong second-quarter

earnings report

revived hope that its discount-heavy site might actually benefit from penny-pinching consumers in lean times.

Amazon's stock is now trading around $83.

The company's net sales in the second quarter grew 41% from the previous year. Excluding changes in foreign exchange rates, it grew only 35%, so the weak dollar hit revenue significantly.

But the dollar has strengthened some since then. In the second quarter of 2007, the dollar averaged 1.35 euros. In the second quarter of this year it averaged 1.56 euros. This month, it's dropped to 1.48 euros, compared to an average of 1.37 euros in the third quarter of 2007. That's still a weak dollar year on year -- just not as weak as many investors may be expecting.

And while it's too early to say the greenback will be substantially stronger during the entire third quarter, some analysts are already wondering if it will take some of the wind out of Amazon's performance this quarter.

Tim Boyd, an analyst at American Technology Research, estimated a stronger dollar could reduce $1.2 billion from Amazon's 2009 revenue, as estimated by other analysts. It would also hurt operating margins, since Amazon pays a lot of overseas expenses with dollars, Boyd said.

If Boyd is right, analysts are either going to have to ratchet down their revenue and profit models for Amazon, or the company could well disappoint when it reports third-quarter numbers in October. Both scenarios spell out a near-term decline for Amazon shares.

But that might also provide an entry point for investors who like the long-term promise Amazon offers.

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Business in the company's core e-tailing operations are likely to grow as the company expands its overseas operations, but two newer initiatives, both small in terms of what they offer Amazon's income statement today, could be much bigger in a few years.

The first is its highly promoted but still unproven Kindle e-book reader. The Kindle received some press attention recently after analysts disagreed on its

salespotential

-- one estimating 380,000 units selling this year and calling it "the iPod of the book world." Another analyst checked with Amazon and offered a more muted forecast.

The Kindle isn't likely to be a big contributor to Amazon's profit this year, or maybe next year. But early adopters are smitten with it, and the company is seriously testing new markets, such as college textbooks. Scanned copies of some textbooks are already finding their way onto P2P networks, so if Amazon can offer a low-cost alternative to $200 textbooks, there is a huge market waiting for them.

The Kindle isn't the iPod of the book world yet -- it's more like the

Nomad Jukebox

, an early, forgotten mp3 player that lacked Apple's graceful design. Amazon is

reportedly

planning to roll out new Kindles for the holidays. Stripping out DRM copyright-protecion software, which alienates many consumers, would be a start.

The second, potentially greater area of growth for Amazon down the road is Interntet-based computer services -- what's now known as cloud computing. Amazon has been offering

Webservices such as Simple Storage Service (or S3) and Elastic Computing Cloud (or EC2) to small companies. But the company has done little marketing and shies away from discussing it on earnings calls.

Late last year, the bandwidth Amazon sells through Web services surpassed what it needs for its own sites.

Some evidence exists

that large companies, such as financial services and pharmaceutical firms, are using Amazon's Web services to outsource their computing power. If so, this also suggests a large, fertile market ahead.

Frustratingly, Amazon won't break out sales for its Web services. They are included in the "other" line on its revenue. But a look at that revenue line since 2005 shows steady growth.

As a percentage of overall company revenue, "other" revenue hasn't grown as dramatically but shows the potential to start becoming a larger chunk of Amazon's business.

Like the Kindle, Amazon's Web services generate a lot of discussion but still remain a relatively insignificant contributor to its overall earnings. But both are being nurtured for their long-term potential, and investors with a broader view on Amazon might keep an eye on both as they gauge the future of the company's stock.