Why Amazon Still Packs a Punch


By Amey Stone Amazon has become the Rocky Balboa of the Internet. Like the fictional aging boxer, just when you think the stock is down for the count, it comes back in fighting shape. Since the outfit reported third-quarter results on Oct. 21 that beat expectations -- but not by a mile -- the stock had plunged 21%, from $61 to $48. But investors who sold on the last leg down Nov. 21 were likely kicking themselves the following Monday when the stock charged up $2.75, or nearly 6%, to close Nov. 24 at $51.33.

On a longer-term basis, the endurance of Amazon (AMZN) is more than apparent: The stock got as low as $5.51 a share in October, 2001, but now it's nearly 10 times that price. The question for investors is whether the Nov. 24 rally was just a brief uptick in the Internet sector on the back of a broad market rally (the Nasdaq jumped nearly 50 points, or 2.2%) -- or could the e-commerce giant be mustering more surprising strength?

Most analysts aren't willing to break out the champagne for Amazon at this point. Steve Weinstein, an analyst with Pacific Crest Securities, for one, has the stock rated neutral, mainly due to its high price-earnings multiple of 56 times his 2004 estimate. The benchmark Standard & Poor's 500-stock has a forward price-earnings ratio of 17.

AVENUES FOR GROWTH. "It's a good company executing fairly well," says Weinstein. "But that's more than reflected in its current price." He believes Amazon will achieve sales of $1.83 billion in the fourth quarter, up from $1.43 billion a year earlier. For 2004, he sees sales of $6.1 billion, up from $5.15 billion this year. "I expect decent growth in the quarter, but I do think growth gets more difficult, and the pace of margin expansion will slow -- which is just a function of a maturing business," Weinstein says.

Shawn Milne, of Soundview Technology, is more open to additional upside surprises from Amazon, even though he downgraded the stock to neutral on the third-quarter results that he calls "great" -- but not quite the blowout -- of earlier quarters. (That was a pretty good call, since the stock promptly fell $11 from the recent high.) "People have been pigeon-holing Amazon for years, arguing they're only going to sell books and videos in the U.S.," says Milne. "The last few quarters have shown that the Amazon story is more open-ended in terms of different areas for growth."

Milne isn't just talking about Amazon's future selling gourmet food and sporting goods (its two newest categories). Instead, he points out that international business now makes up more than 30% of sales and that it is growing rapidly. In the third quarter, international sales grew 61%, vs. a year earlier, to $425 million (helped along to the tune of $28 million by currency changes).

OVERLOOKED STRENGTH. Even more important to consider -- and easy to miss -- is growth in Amazon's third-party-transactions business. These are sales derived from huge retailers like Target (TGT) and Toys 'R' Us (TOYS) selling through Amazon's back end, as well as individuals and independent booksellers selling used books through the portal.

In the third quarter, third-party transactions made up 22% of all items sold on the Amazon site, up from 17% of units a year ago. "That's the part of the story that the shorts really missed," says Milne, referring to investors who are betting the stock price will fall.

Going into Amazon's seasonally strong fourth quarter, there's lots of evidence that shoppers will be turning to the Internet more than ever. And Amazon has clearly figured out how to use its free shipping promotions to drive massive sales volume without eliminating profits. Granted, at $61 a share, it had seemed that many investors were counting on a blockbuster holiday season. At the current price of $51, that may not be the case.

NO DELIGHT? The holiday season could yet disappoint. Short-sellers are currently pointing to the disappearance of Amazon's "Delight-O-Meter" -- a way it tracked strength of holiday shopping on its home page in prior years -- as a sign that the holiday shopping season isn't going well.

Milne thinks that's a stretch. He suspects Amazon just had more interesting uses for that piece of online real estate, including promoting celebrity content, such as its upcoming online concert with Counting Crows. An Amazon spokeswoman says the company has yet to confirm or deny whether it will bring back its real-time holiday sales barometer this year.

The absence of the Delight-O-Meter alone seems like a pretty thin argument for betting that Amazon will fall from here. Amazon's shares are way below their 1999 peak above $100, and it's still a pricey stock. But there's a decent chance that the recent downdraft was the breather the shares needed. Like Rocky of movie fame, Amazon might still have plenty of punch left in it. Stone is a senior writer at BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column


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