Jim Cramer is Bullish on Amazon

Jim Cramer rated Amazon.com (NASDAQ:AMZN) a “buy” three times in April, first on April 25th.  The stock has increased since then.

Despite Cramer’s bullishness, the company reported earnings of $0.44 which missed the consensus by 26%, due to costs associated investments in data warehouses.  Either Cramer is wrong, or analysts’ obsession with companies’ making quarterly earnings estimates is wrong.  Net sales for the first quarter increased to nearly $10 billion, which was ahead of the guidance that Amazon gave of revenue growth of $8.85 billion to $9.65 billion.

So who is correct here?  Is Amazon’s failure to meet consensus expectations a harbinger of troubles at the company?  Or is its investment in data warehouses an indication that Amazon’s management sees a bright futures in data crunching capabilities, and so is willing to take a short-term hit to quarterly earinngs numbers?

Recent growth in e-commerce statistics suggests that the latter interpretation is the more accurate one: Amazon having missed quarterly earnings estimates due to costs associated with long-term investments in data crunching capability comport with the notion that e-commerce revenues are going to grow in the future.  Forrester Research recently released a report projecting that US e-commerce sales will increase from $176 billion in 2010 to $279 billion in 2015.  This is a compound growth rate of 9.6%.

E-commerce sales, of course, depend on consumers being willing to spend.  Right now the yield curve (i.e., the spread between the Fed’s benchmark rate and the 10-year Treasury note) is positive.  The benchmark rate is between 0% and 0.25% and 10-year Treasury’s are yielding 3.25%; this spread augurs economic growth, not recession.  A growing economy is one in which consumers are more willing to spend than they are to husband their resources.

All this having been said, Amazon’s shares are already very richly valued.  Its forward price-to-earnings ratio is 51.36, its price-to-earnings growth ratio (based on projected 5-year earnings) is 2.81, its price-to-sales ratio is 2.39, and its price-to-book ratio is 12.  Amazon is a solidly profitable company and it is not going anywhere any time soon, but it is not so profitable that its shares look reasonably valued.  It is curious, then, to wonder the basis on which Cramer recommends its shares.  Perhaps his intent is that traders can profit by trading the shares in the near term.  But as a long-term investment one wonders what will happen to the shares at the slightest hint of an economic slowdown.

Competitors include: eBay (NASDAQ:EBAY), Barnes & Noble, Inc. (NYSE:BKS), Wal-Mart Stores, Inc. (NYSE:WMT), Overstock.com, Inc. (NASDAQ:OSTK), Google Inc. (NASDAQ:GOOG), Costco Wholesale Corp. (NASDAQ:COST), Hot Topic, Inc. (NASDAQ:HOTT), and PC Mall, Inc. (NASDAQ:MALL).

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