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.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  2. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  9. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  10. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Fast Fashion

    Definition of "fast fashion."
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!