Foolish Forecast: Amazon's Cloud Has a Golden Lining

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Online bookseller-turned-megastore Amazon.com (Nasdaq: AMZN) reports second-quarter earnings after tonight's closing bell. The first quarter was sweet music to fellow Fool Rick Munarriz's ears, but what's next for the digital retailer and media maven?

What Fools say:

Here's how Amazon's CAPS rating stacks up against some of its peers and competitors:

Company	Market Cap (billions)	Trailing P/E Ratio	CAPS Rating
Apple (Nasdaq: AAPL)	$143.5	33.4	****
Yahoo! (Nasdaq: YHOO)	$29.9	29.0	**
Amazon	$28.4	55.9	**
Netflix (Nasdaq: NFLX)	$1.7	26.1	***

Data taken from Motley Fool CAPS on July 23, 2008.

Amazon's rich P/E ratio draws sneers and pointed comments from our CAPS crowd. "The P is like the Amazon river, but the E is more like a creek," muses all-star player jstegma. "I think the creek might run dry if we have an economic drought. With the P/E as high as it is, [Amazon] has little room for error or the stock price will tumble." Wax off, young grasshopper.

On the bullish side of that river stands CAPS player cloudkj, who can articulate how the company's ventures into lots of digital businesses positions it well for the future: "Digital initiatives around the Kindle with books, Unbox with video, Amazon MP3 with music, are all going to increase margins and help make Amazon a leader in digital product delivery." Others rave about the online store experience and a brilliant management team led by founder and CEO Jeff Bezos.

What management does:
Given Amazon's ambition to undercut bricks-and-mortar retail prices, it's not surprising to see slim profit margins across the board -- but the net take is getting a little fatter, quarter by quarter. What the company lacks in big margins, it more than makes up for in accelerating sales growth.

Margins	12/06	3/07	6/07	9/07	12/07	3/08
Gross	22.9%	23%	23.1%	23.1%	22.6%	22.5%
Operating	3.6%	3.7%	4.1%	4.4%	4.4%	4.4%
Net	1.8%	2.2%	2.5%	2.8%	3.2%	3.2%
FCF/Revenue	4.5%	4.6%	5.7%	6.1%	8%	4.9%

Growth (YOY)	12/06	3/07	6/07	9/07	12/07	3/08
Revenue	26.2%	29.1%	31.8%	35.5%	38.5%	39.4%
Earnings	(42.9%)	(24.7%)	1.3%	25.3%	150.5%	103.2%

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

One Fool says:
This stock is not cheap by any reasonable measure -- even the growth-weighted PEG ratio hovers near the pricey 2.0 mark -- but that doesn't mean that you should forget about Amazon. There's a lot of innovation going on here, including a set of cloud-computing services that arguably put mighty Google (Nasdaq: GOOG) to shame. As the enterprise computing market moves online, Amazon is leading the charge with powerful and reasonably priced services like S3 storage and EC2 cloud computing.

Its retailing core has given Amazon all that online processing horsepower to spare, and it lets the company generate enough money today to experiment with new ideas like this. Amazon hasn't missed an earnings estimate in seven quarters running, and it doesn't seem to be disturbed by the gloomy economy. I'd be surprised to see that streak broken today.