Powerhouse e-tailer Amazon (Nasdaq:AMZN) stock recently traded at its high of $161.78 a share, rarefied territory that contributed to one recent downgrade. Fundamental investors have been uneasy about the stock's high valuation for some time, but the real question for those who look at the business first, the stock second, is how well will Amazon keep growing?
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A Short History of Amazon's Growth
Amazon has managed to become a stock with a $70 billion market cap, and it did $28.67 billion in sales and had a $1.09 billion income the last 12 months. Amazon has experienced exponential growth as a once small internet book retailer to become a dominant internet commerce player. The last five years saw sales growth of nearly 28% on average, with income growth of 9%. So the stock sells with a P/E of 64 plus and a forward multiple of 43. Even if you're a wide-eyed growth investor, is this kind of growth sustainable? Citi thinks so, as it upgraded the stock and stuck a $190 price target on it.
Amazon and Others
Amazon has changed or been a party to change in the buying habits of a culture. Its leadership in the book retailing business has seriously wounded its two main brick-and-mortar rivals Barnes & Noble (NYSE:BKS) and Borders (NYSE:BGP), perhaps mortally. While past performance doesn't guarantee anything in the future (see Blockbuster Video's downfall), what may or may not have begun as an accidental effect for Amazon - damaging its competition - has shown that the company at least has the awareness to try to keep innovating and adapting. Blockbuster failed to adapt as a retailer. Or adapt quickly or enough. Once a dominant player in its space, it filed for bankruptcy protection early this month. Borders and to a lesser extent Barnes & Noble are in weakened financial and competitive positions, and neither are assured stand alone survival.
Amazon has not simply sat on its hands, raking in ready cash, but has attempted to develop, expand and continue to innovate in its business. It has developed and continues to refine its e-reader, Kindle, it has expanded its e-tailing beyond books, and it has continued to bolt on acquisitions. Recently the company announced a deal to buy Spanish internet retailer BuyVp for $96.5 million. Amazon has entered the streaming movie space, looking to challenge Netflix (Nasdaq: NFLX). Other entrants such as Google (Nasdaq:GOOG), Best Buy (NYSE:BBY) and Yahoo! (Nasdaq:YHOO) are crowding this field, so Amazon isn't afraid to compete, if nothing else.
Foundation and Future
On the financial side of its fundamentals, Amazon sports a strong balance sheet. At the end of June 2010, the company had over $5 billion in cash and equivalents with only $132 million in long-term debt. With this kind of strength, it should have the wherewithal to keep competing. Amazon's expansion isn't just buying other businesses or entering new competitive arenas such as streaming movies, it is also building up its cloud infrastructure in Europe, a less headline-grabbing move which should give it a stronger platform from which to compete.
It's tempting to get involved in predicting the future. It's better just to point out some reasonable probabilities. Amazon will likely have trouble sustaining its incredible growth rates, as would any business that's maturing. But its management has been astute and continues to look for wide opportunities to grow the company, and to keep it relevant. Amazon's a well-managed company that long-term investors should take a look at when its stock price retreats. (To learn more, see Don't Forget To Read The Prospectus!)
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