Amazon's Coming Lump of Coal

There's little argument that Amazon.com (NASDAQ:AMZN) is a good company, even a great one. Books remain a must-have item in either tangible or electronic form, and the Kindle is hot, having become the top-selling item in terms of both units sold and revenues generated. The e-tailer was the top-visited destination on Black Friday, according to Experian Hitwise, receiving almost 14% of the traffic of the top 500 retail sites.

So Amazon's growth prospects look strong, and that's one of the reasons it's considered a core stock holding on Motley Fool Stock Advisor. Yet that's only half the equation for investors deciding whether they should buy the stock now. It's not enough just to find good companies; you've got to get them at a good price, too.

Read it and weep
Some of my Foolish colleagues have come down on the "Amazon is fairly valued" side of things, but at $132 a share, I agree with those who say Amazon is no Black Friday bargain. Investors will do better if they flip the page and wait for better prices.

Amazon has been generating gobs of cash profits. At its most basic calculation, free cash flow grew 24% sequentially and nearly doubled from the same period last year. But with battles raging on many fronts, the e-commerce leader seems ready to fall.

Wal-Mart (NYSE:WMT) is initiating a price war not only on Amazon's home turf of bookselling, but also on DVD sales, where Target (NYSE:TGT) is refusing to cede ground. Although you may find a broader selection at Amazon, most skirmishes will likely be waged over current releases and best-sellers, and rivals are going to have plenty of inventory on those. With retail sales expected to shrink 1% this Christmas, Wal-Mart's online push could challenge Amazon's superiority, with even squirrelly Overstock.com (NASDAQ:OSTK) seeing higher sales.

Nor can we discount the impact the sub-$10 book is going to have on Kindle sales and e-book downloads, not to mention Sony (NYSE:SNE) and Barnes & Noble (NYSE:BKS) giving the book reader a run for its money. Shipments of Barnes & Noble's Nook, for example, have been delayed for the second time in a month because high demand is pushing delivery back until 2010.

Moreover, eBay (NASDAQ:EBAY) has become more aggressive in trying to woo back customers and sellers. Its new advertising salvo, "Come to think of it, eBay," may start eating away at Amazon's own third-party storefronts.

What price growth?
If we say Amazon can grow earnings at 20% annually for the next five years (analysts predict 25%, but let's be conservative) it will generate profits of almost $1.9 billion at the end of 2014. Slap a multiple of 30 on those earnings, add back in cash on the balance sheet, and we've got a company valued at around $60 billion. That's less than 1% annual growth, or a stock price of less than $140 a share.

Another bit of shorthand gives us owner's earnings of $533 million. Grow that 20% annually for five years, give it an overly generous multiple of 50, add back in the $4 billion in cash, and we've only got Amazon valued at around $66 billion, or 3% compounded growth from today. That's hardly the page-turner everyone's been talking about.

Foolish bottom line
Considering Amazon's long-term growth potential, David Gardner's right that the company ought to be a core holding for investors, and he just updated his outlook for the e-tailer in the latest Stock Advisor issue just released. You can access it here risk-free. However, I would argue that picking and choosing your entry points is part and parcel of investing, and Amazon's price is no gift this holiday season.