Amazon, NASD: AMZN, share price had a tough February. The market sections were not happy with the fourth quarter results released on January 28 and eventually Amazon's share price tumbled from $190 on January 18 to below $170 by the end of the month. In February, AMZN rallied back to the $190 range before dropping again to close the month around $173.
Amazon continues to grow its revenues at a 30 percent clip and the first quarter is forecast to be in that range for sales growth. The problem is getting a bigger percentage of those sales to the bottom line. The 40 percent growth rate for revenues in 2010 pushed Amazon into heavy infrastructure improvement and capital expenditures and operating margins dipped to 3.7 percent in Q4 from 4.1 percent for entire 2010. The number of company distribution centers increased by 13 to 52 in 2010.
Sales growth continues for the electronic and online selling giant and the Kindle e-book has been a huge success. In the fourth quarter, Amazon sold more Kindle electronic books than paperback books for the first time. The company has made Kindle software for all of the major operating systems to tap the projected growth of tablet computers and thereby increase Kindle sales. The tremendous sales growth of Amazon and its ability to sell more products through the system has resulted in pushing AMZN to some amazing valuations.
The consensus earnings estimate for 2011 for Amazon is $3.19 per share. At $173, the multiple on AMZN is 54 times its projected earnings. Analyst estimates have the first quarter per share earnings coming in 8 percent below 2010 Q1. The second quarter estimates are looking for a 26 percent increase over 2010's disappointing results. As with all retailers, investors may have to wait until the big holiday fourth quarter, to see how 2011 works out for Amazon.
In July 2010, AMZN dropped to around $110 per share following the release of its second quarter results. Where Amazon goes from the $173 level is a tough call. On the positive side is the continued expectations of 30 percent plus revenue growth. On the flip side, if Amazon stalls in bringing the revenue growth down to the net income line, will investors bail on this high P/E stock? A look at the stock chart for the last 5 years shows a moderate to relatively severe summer swoon sometime between May and August.
The recent price volatility of AMZN should be enough to keep long term investors on the sidelines to wait and see which side of the Amazon story will win out in the near future -- revenue growth or earnings stagnation. Keep in mind that net income is expected to reach $4.45 in 2010 and at a 50 multiple, Amazon would be a $220 stock.
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