Can Amazon Kindle Long Term Returns?

Shares in US-based online retailer Amazon.com (AMZN) have recovered much of the ground lost during the bear market due to continued revenue growth and increasing free cash flow. The company revealed in its second quarter results announcement that net sales were up 14%.

Much of the hype surrounding Amazon's business relates to its Kindle e-book reader, which features a paper-like dynamic display. Despite the success of the Kindle over the past two years, the product's competitors such as the Sony (SNE) Reader hare yet to gain significant footing. Amazon is resolved to defend its market share, announcing on October 7th that they intend to drop the price of the Kindle from USD 299 to USD 259, while at the same time introducing the product overseas, in over 100 markets. The new US & International Wireless version of the Kindle is expected to be released on October 19th.

The company's second quarter results announcement also revealed that Amazon has continued to expand its business lines, moving into the sale of cell phones and wireless plans for AT&T (T) and Verizon Wireless (VZ). In the second quarter, Amazon launched its MP3 music service in France, which will likely benefit from new anti-piracy laws enacted on September 22nd.

The last SADIF report on Amazon gave the company a positive outlook in July of 2008. The stock has since risen almost 40%. However, in order to assess whether this trend will continue, we should look at how the company's long-term underlying fundamentals have changed over the past 15 months. After splitting the company's key long-term fundamental indicators into three groups (Business, Management, Price-Attractiveness) we run them though our proprietary StockMarks rating models, placing the company on a scale of 1-100. The chart below shows Amazon's ratings for the three fundamental groups as well as a combined 'Total StockMark' rating since early 2006.

Despite a decline since the start of the year, the price-attractiveness rating (Price StockMark) is the strongest of the company's three sub-ratings and suggests that the company's stock price still has significant room to increase based on Amazon's underlying fundamentals. The company's long-term growth rate has improved relative to the US market average over the same period. Amazon's low SMM is common among high-tech growth companies due to above average expenditure on R&D and higher reinvestment levels.

Amazon shares has far outperformed both the Nasdaq composite index and traditional book retailers over the past year. Barnes & Noble (BKS) for example, shows far weaker growth, with a business rating of 36. Shares in Amazon have risen 56% over the past year, compared to a 14% decline in Barnes & Noble shares.

Overall, we continue to believe that Amazon is an above-average investment, based on the company's long term fundamentals and sound strategic position in the online retailer industry.

A summary of our current StockMarks ratings for Amazon.com is available here

Disclosure: No positions

Comments

[Hayweed:]

At a 50 PE AMZN is a real bargain

Oct 11 10:43 AM