Shares of Amazon.com have been soaring like Harry Potter on a broomstick. The stock gained a whopping 24% on July 25, to $86.19 -- a seven-year high -- after the online retailer reported that second-quarter profits had tripled from the same period last year and boosted its earnings guidance for the rest of 2007. Those results beat expectations and garnered upgrades from a host of stock analysts.
The run-up adds to the stock's remarkable performance over the past year. Since last August, the shares (symbol AMZN) have more than tripled, tripping up short sellers, who bet on stocks to fall, and many Wall Street analysts. "We have been caught by surprise by the magnitude and speed of the company's revenue growth and [profit] margin expansion," says Bear Stearns analyst Robert Peck, who raised his rating to "peer perform" from "underperform."
Pre-orders of the blockbuster book Harry Potter and the Deathly Hallows and a popular membership called Amazon Prime contributed to strong U.S. sales. The company earned 19 cents per share in the second quarter, which beat the average analyst forecast of 16 cents per share. The company also raised its revenue forecasts to between $13.8 billion and $14.3 billion for the full year.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Lower costs will give Amazon a tailwind. In the past, the Seattle online retailer has spent a bundle to launch new services and upgrade its technology infrastructure. Its Prime service is a prime example. The service reduces shipping charges on online orders if users pay a $79 annual fee. But Amazon had to give away free trials to generate interest. As the service finds its legs, Amazon won't need to spend as much on promotion. Meanwhile, Amazon has concluded its planned technology improvements, says Value Line analyst Warren Thorpe, who expects the reduced spending to increase profit margins. (Cutbacks in capital expenditures should also boost free cash flow, which is money that Amazon can use to make acquisitions, buy back shares or initiate a dividend.)
After such rapid appreciation, the slightest slip-up by the company could send shares tumbling. "We still project impressive revenue growth and margin expansion over the next five years and think the company can generate triple-digit returns on invested capital over the long term," says Morningstar analyst Joseph Beaulieu. "But even those estimates don't support the company's rich valuation."
The stock is expensive even by dot-com standards. Amazon shares trade at 81 times the $1.06 per share analysts expect the company to earn this year, according to Thomson Financial. Compare that price-earnings ratio with the valuation of eBay, another pure play in online retail. EBay (EBAY; $33.56) trades at 25 times the $1.37 per share analysts expect the company to earn in 2007. Amazon looks a bit cheaper on '08 estimates, trading at "only" 57 times next year's forecasted profits of $1.50 per share.
Amazon will eventually have to prove to investors why its stock is worth such a high premium. For now, though, momentum is with the bulls.
-
Dow Hits New Intraday High on Fed Day: Stock Market TodayNot even the most important stock in the world could keep the oldest equity index down on a significant day for markets.
-
Savings Goal CalculatorTools Want to know how much you need to save each month to reach your financial goals? Our calculator helps you build a realistic savings plan.
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have TodaySherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have TodayUNH stock was a massive market beater for ages — until it wasn't.
-
What Tariffs Mean for Your Sector ExposureNew, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
-
How the Stock Market Performed in the First 6 Months of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have TodayProcter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
