E-commerce giant Amazon (Nasdaq:AMZN) may still be deep in the shadows of Wal-Mart (NYSE:WMT) in terms of its reported sales, but there are precious few companies this size that are producing growth in excess of 40%. Although the Street was spooked by news that this fourth quarter could be a difficult one for this online retailer, investors would seem to have many more years of well above average growth in store with this name. (For more read Steady Growth Stocks Win The Race.)

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Tricky Third Quarter Earnings
Amazon is having no particular difficulty finding top-line growth, but that growth is coming at a cost. Reported revenue rose 44% this quarter, with organic revenue climbing 37%. Growth in media came in at 24%, with North American media sales growing 21%. Electronics and general merchandise looked strong at 59% growth (up 56% in North America), but this result was below most sell-side expectations.

Profitability was tricky. Gross margin actually improved a bit, but the company saw fulfillment expenses jump 65% and marketing expenditures rose 54%. All in all, reported operating income fell 71% and segment operating profit fell 35%. Amazon, along with many analysts, categorize this spending as "investing in the future," and that's fair to a point. Even if the word "investment" is too often used in place of "cost" or "expense," clearly Amazon is building an infrastructure to support a larger business and incurring some diseconomies of scale in the meantime.

Circuit City And Borders Down, Netflix Next?
It's too simplistic to say that Amazon was solely responsible for burying Borders or Circuit City; both of those companies had plenty of missteps that fall squarely on their own heads. Nevertheless, Amazon is a powerful competitive force in many aspects of retailing. Neither Best Buy (NYSE:BBY) nor Barnes & Noble (NYSE:BKS) can afford to rest easy, and a host of niche players have had to seek succor in private hands.

With Amazon expanding its Amazon Prime business, it looks like Netflix (Nasdaq:NFLX) has a little more to worry about in the near future. Netflix has seriously irritated (if not outright alienated) thousands of customers and Amazon seems to be building an attractive (and highly leverageable) competitive platform. (For more on why Amazon thrived as others have failed, check out The Characteristics Of A Successful Company.)

Plenty of Opportunities and the Challenges Seem Digestible
Certainly Amazon cannot afford to rest easy itself. Many states are looking to recapture sales tax revenue from this company and losing (or surrendering) that fight will represent a hit to margins (and/or sales). Moreover, companies like Apple (Nasdaq:AAPL) and eBay (Nasdaq:EBAY) have some of their own ideas and strategies regarding online commerce.

Still, Amazon has a lot of growth opportunities and the financial means to explore them. As Google (Nasdaq:GOOG) has long since transitioned from being "just" a search engine and eBay has a strong online payment franchise, so too does Amazon have opportunities above and beyond traditional e-tailing. Amazon is already in position to play the software-as-a-service trend and perhaps become a provider of even more services to its merchant partners.

The Bottom Line
Some readers will think it daft to find any value in a stock trading at 13 times book value and 53 times its trailing EBITDA. And yet, if Amazon can hit some admittedly demanding growth targets, the shares are not all that expensive. Amazon should be able to lever even more cash flow out of its business in the coming years and taking more and more business from traditional retailers, as well as expanding new markets like e-books and on-demand media, could produce much of the growth that the valuation demands. (For more, read Choosing The Winners In The Click-And-Mortar Game.)

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