Sept. 3, 2012
-- Amazon.com, Inc. (AMZN) stock is up 12%. We think it is an ideal time to realize gains, as Amazon is going to see large investments in fulfillment centers and technology (mobile devices and apps) hurt its bottom line in the coming quarters. The returns from these investments will benefit the company over the long run. The current net profit margin stands at 0.6% (trailing twelve months), down from the 5-year average of 2.72%. Moreover, there have been some insider sales in the last month. Investors should now wait for a better entry point.
Amazon has no long-term debt, and has cash in hand of $4.97 billion; the company has operating cash flows of $3.22 billion. This is good for the investments that Amazon wants to make to give its customers a same-day delivery option. The company keeps engaging in share issues and buybacks.
From a competitor's point of view, Amazon is the beneficiary of Best Buy Co. (BBY) losing its market share in electronics retail. Amazon Prime and LoveFilm compete with Netflix. LoveFilm's unlimited streaming costs £4.99/month, as compared to Netflix charging $7.99/month.
Amazon is a high risk investment because of its high multiple relative to its earnings. Any short term fall in revenues or gross margin can have a significant impact on the share price. However, over the long run, Amazon is set to continue to benefit from the consumer shift from offline to online.
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