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Tickers in this Article: AMZN, AAPL, WMT, BKS, EBAY
Online retailer Amazon (NASDAQ:AMZN) continues to pour it on. This online juggernaut, which now sells just about everything under the sun, reported results that continue to defy expectations. In the 2009 fourth quarter, net sales shot up by 37% on an apples-to-apples comparison. The bottom line benefited even more - up 71% in the quarter, representing 85 cents per share. For the full year, sales were up nearly 30% to $24.5 billion and net income reached $900 million, up 40%. Even more impressive is the effect on cash: free cash flow for 2009 was nearly $3 billion, more than twice the cash generated in 2008.

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Kindling a Flame
While the company does not release exact sales of the company's e-book reader, the Kindle, CEO Jeff Bezos stated that millions have been sold and that six e-books are sold for every 10 physical books sold. This is an impressive feat thus far, but without specifics, it fails to say how much profit Amazon is earning on Kindle books. Despite the amazing growth numbers, Amazon's annual profit represents less than a 5% net margin, a figure that seems incredibly low for an online business devoid of all the capital costs of running a physical business. Consider that eBay (NASDAQ:EBAY) produces operating margins of 17% versus 4.5% for Amazon. Even bricks and mortar bookstore company Barnes and Noble (NYSE:BKS) produces operating margins of 3%, slightly below Amazon.

Intense Competition
Amazon's margins can only be explained by one factor, the cutthroat competition that it faces from all angles. Several months ago, Wal-Mart (NYSE:WMT) began selling many books online for under $10, so Amazon had to respond. And despite the Kindle's apparent success thus far, it's far from certain the margins Amazon is making on the books. And this week's announcement by Apple (NASDAQ:AAPL) that its new product, the iPad will come equipped with a built-in e-book reader, only proves that competition is getting more heated, which often leads to lower margins. Amazon's newest version of the Kindle, the DX currently sells for $499, the exact same price that the basic iPad will go for. Yet with the iPad, you're also getting a computer. That means that somethings gotta give for Amazon.

Time Will Tell
Amazon earned $2.04 per share in 2009. With a stock price of $130, investors are paying 65 times today's earnings. Even if earnings grow at 40% next year, that implies EPS of under $3, which at the current price stills look very expensive going forward. Buyer beware - Amazon's online bargains has lead to an overvalued stock.

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