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Business Week's Rob Hof argues in a piece called Why Amazon Could Keep Flowing that the recent negativity on the stock has been overdone. His key points:

  • Analyst's may now be underestimating Amazon's revenue growth.
    Current estimates are that Amazon will grow by 16% (year over year)
    during Q4 2004, versus 25% growth for the overall U.S. ecommerce market.
  • Faster third party sales growth may appear as slower revenue growth.
    Amazon books only its commission when customers purchase goods from
    third party vendors such as Target via Amazon's web site. Since those
    commissions tend to be less than 10% of the purchases value, third
    party sales result in slower revenue growth than purchases from
    Amazon's own inventory. But they are actually more profitable for
    Amazon.
  • New businesses getting traction. Amazon recently announced
    that sales of consumer electronics overtook sales of books, music and
    video. And Amazon's A9 search engine seems to be profitable, even
    including the discounts given to A9 users on Amazon products.
  • Stock not that expensive. Amazon is trading at about 41
    times estimated 2005 earnings. Most analysts are bearish on the stock:
    15 of the 22 who cover the stock have a Hold or Sell rating on it. But
    given Amazon's cash-flow generative business model and growth, it's not
    that pricey.

Quick thought: Amazon's profitability would rise
significantly if it could leverage its brand name and the traffic to
its web site by further "virtualizing" its business. The best immediate
move? Purchase one of the comparison shopping engines. And its business
will likely become more virtual when music and video are delivered
electronically, though clearly there will be new competitive challenges.

Source: Business Week says don't be too negative on Amazon