Avoid The Recent Hot IPOs And Buy Amazon Instead

Dec.20.11 | About: Amazon.com, Inc. (AMZN)

Amazon.com (NASDAQ:AMZN) is the world's largest online market, catering to consumers, business and enterprise. What was once the place to go for books is now the place to go for all of your online shopping and e-commerce needs. Seriously. Try making a search to buy something and you're likely to get at least one return for Amazon.com. Its closest competitor, eBay (NASDAQ:EBAY), was noticeably absent when I was test-searching. Likewise, other online retail stores such as Overstock.com (NASDAQ:OSTK) were not to be found. Amazon is obviously a strong and growing company but the question remains, should I be buying it?

Amazon does make money. But how? The answer, literally, is in a million ways. On a search engine optimization basis, Amazon is beating its competition. I made some sample searches just to see how wide ranging Amazon's products were and I learned a few things. First, you can buy anything on Amazon. I found mufflers for cars, toys for the kids, and lingerie for the ladies all under Amazon.com. Second, it's cheaper. Products listed on Amazon.com were selling for far less than competitors like eBay and Overstock.com. As an added bonus, Amazon has extended its offer for free shipping, a move that will impact the bottom line and will also increase traffic.

In another move to build its future sales pipeline Amazon is selling its Kindle Fire e-reader at a loss. This is in order to compete with Apple's (NASDAQ:AAPL) iPad device. This move contributes to Amazon's expected loss in the fourth quarter, but is expected to generate close to $400 per device in future sales of books and applications. This is a net positive for the company. The Kindle Fire has sold over 1 million units each week over the past three weeks, which equals over $1 billion in expected future sales.

Revenue in 2010 was $34.2 billion and expectations for this year are $48.8 billion. However, operating margins shrunk in 2011, due to investment in future growth. Despite the expected drop in operating margins and possible net loss for the current quarter, Amazon is doing remarkably well versus the competition. The debt/equity ratio is a little high at 30% (compared to eBay's 9%) and operating margins are low for the current year. Amazon's P/E ratio compared to eBay is not attractive, at 96.3 (eBay is at 18.3). However, these valuations will improve as Amazon's investments in growth begin to pay off in 2012.

Amazon is currently trading around $185 on a mild spike in volume. Bearish activity over the last two months has brought Amazon back to its long term trend and a support level which has been in place for over 12 months. Amazon is oversold at this level in the intermediate and long term. This week, a bullish hammer appeared, confirming support and a possible return to the long term bullish trend. The hammer, a candle chart signal, came on high volume, a significant event for technical traders. Amazon may trend sideways into the New Year while the general market consolidates.

Some hurdles to Amazon's continued performance include user feedback on the Kindle Fire, operating margins, and further global economic slowdown. The Kindle is getting some negative feedback, particularly along the lines of user friendliness. If Amazon cannot improve user interface compared to Apple's iPad it will risk losing any projected gains based on sales of Kindle content.

The bottom line is this. While everyone else is going gaga over high profile IPOs such as Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA), quality stocks such as Amazon are being overlooked. Amazon has a proven track record of sales, growth and return on investment. Amazon is well diversified in the market place and has global exposure. Amazon is competing successfully with the likes of Apple and is positioning itself for further U.S. recovery and expansion. Amazon is a cautious buy around the $180 level. Market sentiment, and worry over global recession, will keep the markets in check, so look out for buying opportunities. Options for Amazon are at historically high levels year-to-date, but still fairly valued. Covered calls and bull spreads may prove to be the safest way to gain exposure to Amazon at this time. Just out-of-the money calls on Amazon for January 2012 are selling around $8, which would make a 4.5% discount/profit at the current price for an investor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.