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Tuesday, August 15, 2006

10Q Review: Will Amazon Ever Get Cheap? AMZN

Some investors will argue that almost any company is a bargain at a certain price. However, some shareholder have seen their stock go to zero, so some companies are not a buy at any price.

The issue of how far is down now dogs Amazon. Its stock is down 50% from a 52-week high of $50 to $26.53. Its price to sales ratio is down to below 1.2. Caris & Company recently initiated coverage at “below average” claiming that, according to Forbes “there is nothing truly unique” about the company.

Not everyone sees it that way. A recent report on the company from Morningstar was more sanguine about Amazon’s future: “Despite our concern about the company's spending habits, we remain big fans of Amazon's business model and competitive position, and we think the company will continue to generate impressive returns on invested capital and create substantial shareholder value.'s massive and loyal customer base, along with its ability to substantially increase sales with limited capital expenditures, is the foundation of a wide economic moat.” That’s fairly high praise for a company trading at its 52-week low.

It is worth noting that a company like eBay trades at about seven times sales, and that might make Amazon look like a steal.

Revenue in the quarter ending June 30 rose from $1.753 billion last year to $2.139 in the most recent quarter. As expenses rose, income from operation fell to $47 million from $104 million last year.

Net sales overseas are catching up with the US. In the most recent quarter, North American sales were $1.157 billion and international sales were $982 million. The segment operating income for international was $55 million, well ahead of the $25 million in North America. The company blamed a “free shipping offer” for most of its margin problems in North America.

What is clear from the company’s 10Q is that while media sales (primarily books) is growing more slowly, at a rate of 16%, sales of electronics and other general merchandise grew at 37%.

The company’s third quarter quidance for Q3 as forecast in the 10Q was not pretty: Net sales are expected to be between $2.17 billion and $2.33 billion, or to grow between 17% and 25% compared with third quarter 2005.

Some investors are concerned that Amazon has lost its focus, and there is some evidence of that. The company plans to sell movies online and has looked at other initiatives that may seem ill-advised. But, in the “glass half full” world, companies that do not innovate and take risks and experience some degree of failure will never grow. The company’s documents support that fact that the business still has robust growth, at least in some segments, and that Amazon does not deserve to be on the scrap heap.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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