Will Amazon’s Stock Continue Its Ascent?

With shares of Amazon Inc. (NASDAQ:AMZN) trading at around $273.65, is AMZN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Amazon is up over 5 percent today after releasing earnings last night. Q4 EPS came in at $0.21 on revenue of $21.27 billion. Operating income blew away expectations and was up 56 percent year-over-year. Operating cash flow increased 7 percent to $4.18 billion. Free cash flow decreased a whopping 81 percent to $395 million, but Amazon was wise to have set the stage for this earlier so it wasn’t a surprise. The primary reason for the drop in free cash flow was a $1.40 billion purchase of corporate office space and property in Seattle, Washington. Considering Amazon’s consistent growth, they needed the space, but the cost seems a bit high if the goal is to remain budget-conscious.

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The hottest item on Amazon.com has been the Kindle Fire HD. Founder and CEO Jeff Bezos stated, “eBooks is a multi-billion dollar category for us and growing fast – up approximately 70 percent last year.” Physical books showed the slowest growth for December in 17 years, but it was still an increase of 5 percent. Amazon also announced its AutoRip feature, which will allow free MP3 versions of CDs purchased from Amazon.com.

Amazon’s digital media library is growing to an unfathomable size, and strategic partnerships are being made on a regular basis.

From here, it looks like Amazon is a no-brainer for OUTPERFORM, but let’s take a look at some important numbers prior to forming an opinion.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Amazon is normal and a non-factor. The balance sheet is strong.

Debt-To-Equity

Cash

Long-Term Debt

AMZN

0.35

$5.25 Billion

$2.68 Billion

EBAY

0.22

$9.41 Billion

$4.11 Billion

OSTK

0.80

$74.53 Million

$17.00 Million

 

T = Technicals on the Stock Chart Are Strong  

Amazon has outperformed the market over the past year, but its run hasn’t been as impressive as eBay Inc. (NASDAQ:EBAY) or Overstock.com Inc. (NASDAQ:OSTK).

1 Month

Year-To-Date

1 Year

3 Year

AMZN

10.53%

8.02%

41.04%

116.10%

EBAY

11.95%

9.34%

76.57%

142.20%

OSTK

-0.57%

-3.07%

101.00%

16.95%

 

At $273.65, Amazon is currently trading above all its averages.  

50-Day SMA

255.58

100-Day SMA

250.66

200-Day SMA

236.43

 

E = Earnings Have Been Inconsistent    

FY2012 net sales increase 27 percent to $61.09 billion, but there was a net loss of $39.00 million. However, tech investors are much more interested in top-line growth, and Amazon has shown consistent annual revenue growth.

2007

2008

2009

2010

2011

Revenue ($)in billions

14.84

19.17

24.51

34.20

48.08

Diluted EPS ($)

1.12

1.49

2.04

2.53

1.37

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

10.88

17.43

13.18

12.83

13.81

Diluted EPS ($)

0.14

0.38

0.28

0.01

-0.60

 

T = Trends Support the Industry

The popularity of eBooks is growing rapidly, and Amazon has infiltrated almost every other market imaginable. Therefore, unless the consumer falls asleep, there is always going to be a trend supporting the industry for Amazon.

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

On the positive side, Amazon continues to improve its top line, there is still a lot more room to grow on a global scale, the balance sheet is healthy, stock performance has been excellent, and operating cash flow has increased. On the negative side, margins are terribly weak, and the Forward P/E is high at 68.00. Guidance for Q1 is $15 billion to $16.6 billion, which would represent a 14 percent to 26 percent increase year-over-year.

This is a rare case where the real danger is missing an opportunity opposed to getting hurt. Considering the stock’s recent tear, any investors not involved have likely missed the boat. If there is a pullback, then Amazon should be strongly considered. In the meantime, Amazon is a WAIT AND SEE.

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