Risk/Return: What’s Apple about Amazon
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The Fiscal Times
October 31, 2011

Jittery investors really didn’t like last week’s earnings news from Amazon, the online retailer of just about everything -- from books to sapphire earrings -- with the possible exception of pet unicorns. On the surface, their reaction was entirely rational after Amazon’s announcement that profits plunged an astonishing 73%, a mere 14 cents a share, and revenues hit $10.88 billion, below expectations. So Amazon’s stock price, which started last week north of $230 a share, ended it at $217.20, and the company’s critics may well argue that given a trailing price/earnings ratio of 115 (trading at 68 times forecast earnings) and the possibility of an operating loss in the fourth quarter, that’s generous. Heck, the company doesn’t even pay dividends.

But what the selloff ignores is that Amazon could turn out to be one of those rare game-changing stocks like Apple and that it’s still early in the process. The company has already changed the way we shop for books and other items; now it’s setting out to redefine the way we read (via its immensely popular Kindle e-readers) and even listen to music or consume video content with its “cloud” storage. If CEO Jeff Bezos gets his way, in a decade or so we’ll look back in amusement at those overpriced Apple gadgets and wonder why we ever owned an iPad instead of the next-gen Kindle.

Ambitious and risky? Sure. But that’s how companies evolve and grow, especially in the long term, and Bezos clearly has his eye on the long term. Why worry that Amazon will lose $5 or $10 on the sale of each $199 Kindle Fire device (making its debut next week) if it will make an extra $50 to $100 through the sale of content? And it’s the kind of content that doesn’t require warehouse infrastructure to deliver – a bonus for Amazon’s bottom line.

Look at this selloff as a chance to get into Amazon at a relatively inexpensive price. Unless there’s a big quality glitch with Kindle Fire, its launch will reignite some of the buzz surrounding the stock. Meanwhile, all that aggressive spending sets the stage for big growth, say some analysts who track the stock. Mark Mahaney at Citigroup expects to see a 40% jump in revenue, higher margins, and earnings that soar as much as 80% next year – and has slapped a $255 price target on the stock.

It’s far too early in Amazon’s effort to change the nature of the game to declare that it’s lost simply because of lower earnings and margins. Especially when the reason for those results is that the company is investing for future growth. Isn’t that what we want all those businesses out there sitting on mountains of corporate cash to do?


 

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.