Is Motley Fool Stock Advisor recommendation (NASDAQ:AMZN) an aging growth stock and a cash cow?

Net sales in the latest earnings report increased 24% compared with the same quarter last year -- at the high end of company guidance for 18% to 25% sales growth in 2005. This read well, but Amazon's sales growth rate has been declining, and analysts expect 2006 sales to increase by just 16.6%. So, on the sales front, we're looking at declining sales growth -- probably in part a function of emergent competitors such as Rule BreakerOverstock (NASDAQ:OSTK), which might drive declining pricing power.

Let's skip net income (and lots of words about charges), which was materially affected by increases in tax expense but bolstered by a gain of roughly half the amount, because of effects of a change in accounting principle (a prior-period adjustment to stock-options treatment). Operating income fell 2% to $108 million, although it benefited from a $3 million change in foreign currency rates. To get an apples-to-apples comparison with 2004's first quarter, you must add in a $14 million expense caused by new accounting rules for stock-based compensation. On that basis, operating income increased 10%, and margins declined by almost a percentage point to 6.4% (net of losses associated with accounting for options).

We, the diligent investing public, might do well to take note of Amazon's spiraling operating expenses -- as the company increased investment in infrastructure and marketing. Operating expenses increased 39% alongside the aforementioned 24% revenue increase, 22% if you net out a gain associated with favorable currency adjustments. What does this mean to us?

Well, a lot of things, but you knew that much. Unique to Amazon's financial footnotes is an item called "net shipping loss." Simply put, when shipping costs Amazon pays are not covered by what the customer pays, that loss gets captured and reported. Free shipping offers and the company's new Amazon Prime -- where a $79 annual fee allows free express shipping for up to four family members in a household -- caused the net shipping loss to increase 29% to $55 million.

Since Amazon Prime was introduced just in February, it is too early to tell what the overall impact on margins will be. Clearly, Amazon is trying to win customer loyalty by making shipping costs a non-issue to its most frequent customers. And, for now, the company is sticking to its operating income guidance for 2005 of $395 million to $510 million.

Are you concluding this aging growth vehicle is becoming earnings-challenged? Well, guess again. Although the fourth quarter's holiday season is critical to earnings, the company expects (apples-to-apples) operating income to increase between 15.8% and 41.9% year over year. What a range!

Also don't overlook trailing 12-month free cash flow, which, as of the first quarter, increased heartily to $417 million. That is a substantial amount of money for a company with a net debt (total debt minus cash) of a mere $410 million.

Amazon's stock has fallen 31% over the past 52 weeks and is down 6% today. A slowing growth rate and falling margins are certainly hurting the stock -- the stock still trades at a premium 29 times 2005 earnings. But investors would be wise to listen to last night's conference call and hear the company's pledge to grow free cash flow. For 29 times earnings, you are getting a premier e-commerce company that really is a cash cow.

David Gardner chose Amazon as one of his Motley Fool Stock Advisor recommendations. To find out which other companies have made the cut, subscribe today without risk for six months.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.