Top picks 2012: Amazon

The giant e-tailer takes the long view with new shipping centers, aggressive pricing and growing customer base.

By TheStockAdvisors Dec 26, 2011 11:30AM
 Image: Moving boxes (© Michael Hitoshi/Getty Images/Getty Images)This post is one in a series in which 50 newsletter advisors share their Top Picks for 2012. 

By Stephen Quickel,US Investment Report

Amazon.com (AMZN) is a controversial call that we think will bear rich fruit long-term, and should begin to perform nicely during 2012.

The giant Internet retailer, with revenues in the $50 billion range -- 10 times its sales in 2003 and twice its 2009 total -- has taken a great tumble.

It had soared from $40 in 2008 to $247 this October, with its P/E ratio frequently topping 100. And why not? Earnings had doubled and redoubled, and then redoubled again, since Amazon broke into the black in 2003 -- six years after its 1997 initial offering.

But since mid-October, to the shock of trusting shareholders, AMZN has plunged to $170 in late December.

Suddenly quarterly earnings have dipped, despite super-charged sales growth. And even now, with its forward P/E still at 85 times 2012 estimated earnings, there is no assurance that the stock has bottomed.

So why consider owning it? Because Amazon, quite simply, is a different kind of company than most. As columnist James Stewart of the New York Times noted recently, Amazon is one of the rare companies that "has been true to its word to manage for the long term."

That's the pledge CEO Jeff Bezos made 15 years ago when Amazon went public -- and he is still doggedly pursuing, to the discomfort of short-sighted hedge fund managers and speculative traders.

Amazon, just as it has done consistently over the years, is investing heavily in the future, with a time horizon of five to seven years. And right now, Bezos sees an especially alluring future and is spending heavily to reap the long-range benefits.

Specifically, Amazon's quarterly earnings have slipped in late 2011 because it is opening no less than 17 gigantic new fulfillment centers and has been slashing prices of its Kindle e-readers and new Kindle Fire tablets.

As a result, sales are still soaring. But with rapid expansion and price cutting, Amazon is sacrificing near-term earnings in order to sell more and more content, apps and other products, which will balloon earnings as more and more consumers own its e-readers, tablets and other devices.

Amazon is also pressuring Barnes & Noble (BKS) and Best Buy (BBY), having driven Borders to the wall. One well-known advisory service predicts that earnings will revive to $9 a share by 2016.

Last year it earned $2.53, up from 45 cents five years earlier, but analysts (according to First Call) have now cut their 2011 consensus to $1.20.

However, they also project a rebound to just over $2 in 2012 and $3.72 in 2013. At today's reduced forward P/E of 85 times year-ahead earnings, this could lift AMZN above $300 (85 times $3.72) during 2012.

If Bezos' long-term focus does generate $9 of earnings in 2016 -- well, pick a multiple and do the math yourself. At a mere 50 times earnings, the price could triple to $450.

Can investors get over their disillusionment? It may take time, with a bit more price slippage. But this is not a Netflix-type collapse, where cocky management made idiotic decisions that drove away its customer base.

Amazon, in sharp contrast, still has an eager customer base, and is making near-term sacrifices to grow much larger, and over the long haul sell them more stuff.

Steven Halpern's TheStockAdvisors.com offers a free daily review of the favorite stock ideas of the nation's top financial newsletter advisors.

Tags: AMZN
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