Is Amazon.com Inc. Destined for Greatness (Again)?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Amazon.com (NASDAQ: AMZN  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Amazon's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Amazon's key statistics:

AMZN Total Return Price Chart

AMZN Total Return Price data by YCharts

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

111.5%

Pass

Improving profit margin

(86.6%)

Fail

Free cash flow growth > Net income growth

(20.3%) vs. (71.6%)

Fail (no growth)

Improving EPS

(72.6%)

Fail

Stock growth (+ 15%) < EPS growth

85.5% vs. (72.6%)

Fail

Source: YCharts. * Period begins at end of Q1 2011

AMZN Return on Equity (TTM) Chart

AMZN Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(80.3%)

Fail

Declining debt to equity

826.1%

Fail

Source: YCharts. * Period begins at end of Q1 2011

How we got here and where we're going
Despite its long-standing status as a growth investor favorite, Amazon.com is not looking particularly healthy today on its way to a disappointing one-of-seven score. As usual, Amazon.com continues to propel its top line higher as it continues to serve as the default online shopping gateway for millions, but the company's relentless focus on expansion has decimated its profitability metrics. Earnings per share, for example, are near their lowest level in a decade. Amazon.com has always been an unusual stock in valuation terms, but investors may finally be tiring of Jeff Bezos' efforts to run something like a publicly traded nonprofit, if the stock's 16% decline this year is any indication. Can Amazon.com regain its swagger, and improve its profitability, without risking its culture of relentless expansion? Let's dig deeper to find out.

Amazon.com's latest effort to control the entire technology value chain, the Fire Phone, has created a media firestorm over the past few weeks. Opinions seem divided between "this will be huge!" or "this will fail horribly!" (there's not much middle ground here), but the more optimistic Fire Phone assessments seem to forget Amazon.com's well-established history as a mobile hardware manufacturer.

Few tech companies have ever posed a credible threat to Apple (NASDAQ: AAPL  ) or Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) when it comes to mobile ecosystems, but Amazon.com was once thought to be that threat in the early days after its launch of the Kindle Fire tablet. Amazon.com's aggressive pricing and solid hardware (sold at a loss  to encourage highly profitable media consumption, a la gaming consoles) made it popular during its first holiday season, but sales have cratered since. The latest IDC tablet sales tracking report  shows Apple with a third of the market, Android tablet-makers Samsung and ASUS in second and third place with a combined 27% market share ... and Amazon trailing far behind with less than 2% of the tablet market.

There are two modes of thought on the Fire Phone, but based on Amazon.com's history, it makes more sense to listen to the pessimists. Fool writers Leo Sun and Timothy Green are in the latter camp, with each offering several reasons why the Fire Phone is likely to fail. The Fire Phone has been billed as a real challenger to Apple's iPhone, but it's clearly not -- the phone's focus on streamlined shopping essentially turns it into a high-tech money funnel leading straight to Seattle. This, come to think of it, also serves as an accurate description of the Kindle Fire.

Amazon.com's other recent initiatives show various levels of maturity, from no-brainer collaborations like a growing promotional partnership with Twitter to pie-in-the-sky schemes like automated delivery drones. There's also a new plugin developed for the company's Amazon Web Services (AWS) cloud platform to brazenly lure VMWare clients onto AWS servers. And then there's Amazon.com's payment-service initiative, which offers the company's 244 million customers a way to pay for everything they don't buy on Amazon.com. With the exception of the drone scheme, these three efforts all leverage Amazon.com's strengths as an online retailer or as a dominant cloud-services vendor. Payment services is likely to be by far the most lucrative, and it could wind up being the next big thing that sends Amazon.com's cash flow shooting to the moon.

Putting the pieces together
Today, Amazon.com has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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