Foolish Forecast: Amazon in the Thicket

You know the old saying about how it's hard to see the forest for the trees? I've got to wonder whether that's happening these days with Amazon.com (Nasdaq: AMZN  ) . Analysts hate this company, but customers love it.

What analysts say:

  • Buy, sell, or waffle? In the long run, isn't it the customers who get to decide whether a company is a success? Amazon.com shareholders should hope so, because if analysts get to choose, the company is doomed. Of the 23 analysts who track it, only two give Amazon buy ratings. Nine say to sell, and a full dozen are ambivalent.
  • Revenues. Yet Wall Street thinks the company grew its sales by 17% last quarter, to $2.2 billion.
  • Earnings. Unfortunately, they also think its profits fell by a third, to $0.12 per share. On both of these numbers, we'll hear Amazon's version of the story when it reports Q1 2006 earnings tomorrow after the bell.

What management says:
On Friday, Amazon filed a copy of its annual letter to shareholders with the Securities and Exchange Commission, which crystallized the dispute between customers and analysts. I'll summarize it here, but if you're at all interested in the company, you owe it to yourself to read the whole thing. In essence, Amazon argues that its critics are focusing on short-term "trees" when evaluating how many of its actions -- such as lowering prices or offering free shipping on orders of more than $25 in value -- will affect earnings. While admitting to the deleterious short-term effects on its profitability, CEO Jeff Bezos points to the "forest," arguing that Amazon's actions are good for two reasons: they will strengthen the firm's free cash flow and cement its dominance of e-commerce in the long run, and they're the right thing to do for Amazon's customers.

And yes, he thinks those two points are related.

What management does:
From a pure numbers perspective, Amazon's critics clearly have cause for concern. Over the past 18 months, the company's operating margin has declined by more than 100 basis points, and on a net basis, it has become 16% less profitable.

Margins %

9/04

12/04

3/05

6/05

9/05

12/05

Gross

23.5

23.1

23.3

23.6

23.8

24

Op.

6.7

6.5

6.8

6.8

6.4

5.6

Net

5

8.5

7.6

6.9

6.3

4.2

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
As for what the long-term future will hold, who can tell? Even Bezos doesn't claim to know the answer. But from this Fool's perspective, Bezos' reasoning does have some merit. After all, Wal-Mart (NYSE: WMT  ) didn't become the world's largest and most successful retailer by jacking up prices on its customers. Rather, it cut costs whenever and wherever it could, and it passed the savings immediately on to consumers.

As Bezos leads his company through this forest, shareholders may take some comfort in knowing that the path he's following turned out pretty well for the last company that trod it.

Competitors:

Amazon and Best Buy are bothMotley Fool Stock Advisorrecommendations. For more of Tom and David Gardner's picks, try Stock Advisor out free for 30 days.

Fool contributorRich Smithdoes not own shares of any company named above.


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