Amazing Amazon

Written by Andrew Szabo
Thursday, 29 October 2009 00:00

Amazon released quarterly earnings, which were up a remarkable 62% versus last year’s (weak) third quarter. The announcement, made after trading hours on Oct. 22, caused shares to surge almost 15% in after-market trading (from $93.45 to $107.07) and to close the following day at $118.49. The lowest trade for this stock in the past year was $34.68 (Nov. 20, 2008). If you like to kick yourself in the pants for missing a big one, this stock will suffice. The impressive results give evidence both of resurgence of consumer demand and of Amazon’s fundamental strengths as a retailer.

Amazon always had potential to be the superstore to beat. It has the online ordering, warehousing and distribution system down pat. It knows how to stock but not overstock. Amazon has effectively adapted a system of artificial intelligence (based on Bayesian statistics) to suggest — based on your past browsing and buying activities at the site — other items you may wish to buy. Apple recently introduced an analogous feature at iTunes called “Genius,” which gives very apt and striking suggestions in many cases, at least after it has a few weeks of activity to learn of your interests. That one is so good that you may fear that Big Brother is watching you.

One factor driving Amazon’s success has been the popularity of its “Prime” program, under which U.S. customers pay $79 per year for unlimited two-day shipping of eligible merchandise. The eligible stuff includes almost everything Amazon sells directly. I don’t usually give little tidbits of personal financial advice, à la Suze Ormann, but it must be said, this is a very good deal if you frequently buy online.

Amazon’s “Kindle” electronic book has a good head start, but it now will face competition from such companies as SONY. The electronic book will eventually meld with the tablet PC, with uncertain opportunities and risks for Amazon.

Another success for Amazon has been its distribution pacts with a wide range of other merchandisers. This may be siphoning some business away from eBay, whose offerings are less organized and much harder to find. Moreover, the frequent choice at eBay of whether to buy something right away at a guaranteed price or go into an auction leaves me dithering and usually doing nothing.

I have sold some books though Amazon. If you are patient, and you have something desirable, you can fetch a good price. The merchant feature whereby users grade your reputation as a seller (also used at eBay) often provides valuable clues to the buyer. As to books, I find some of the user book reviews helpful and have contributed myself.

Amazon is now trading at about 80 times earnings for the trailing 12 months and about 50 times analysts’ expectations for 2010. However, some of those analyst expectations are still being revised upward. Amazon continues in growth mode. It is one of America’s premier merchandisers. However, wait for a major correction (down 20%) to buy this stock, then put it your long-term portfolio.

[Note: please see this week's Post for a correction regarding last week’s column.]

Andrew Szabo has no personal holdings or interest in the following referenced investments and has received no compensation for providing the research from any of the listed companies. This column is not a substitute for individualized advice from an adviser or accountant.

Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment adviser. Questions, call 531-2877 or e-mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it .