Does Amazon Still Have Growth Potential?

Last week, Citigroup analyst Mark Mahaney published a report identifying that Chinese suppliers of Kindle hardware are also in preparations to build an Amazon Kindle Phone.  This comes soon after Amazon’s launch of their $200 Kindle Fire device and signals that Amazon is serious about extending their reach to customers to include not just the content they consume, but the hardware upon which they consume it.  This is a transformation for the company and signals the potential for a transformation from e-retailer to a full-service content platform similar to Apple.  So do you think Amazon has what it takes, and will you buy shares to ride the growth?

In order to determine Amazon’s current stock position, we must look at a few key indicators and the history of the price.  The chart below shoes the stock activity between November 2010 and November 2011.

Amazon, which is jumping around the $200 mark today,  was around $170 in November 2010.  The stock struggled to grow and hit a massive setback in mid February, when analysts began to suspect that profit from the quarter would be reduced, and were right.  Income for the first quarter of 2011 was $201 million, down from $299 million a year before.  Amazon cited the earthquake in Japan as having reduced international sales, and while Amazon was touting the importance of their newly released Kindle and Cloud music services, but that wasn’t enough to rally the stock.

The next major action occurred as we see a  huge spike in July after a year of sluggish growth.  After the weak first quarter, Analysts had estimated that sales growth would reduce, and when Amazon announced net income of $190 million — less than the first quarter — it still surpassed pessimistic analysis.  This converted to revenues of 41 cents a share vs analyst estimates of 35 cents a share.  While Amazon doesn’t clearly break out it’s Kindle sales in its earnings report, “worldwide electronics” sales jumped to $5.89 billion, demonstrating 69% growth.

We can see in the 3rd quarter which ends in September there must have been some bad news.  While Amazon’s net sales increased to over $10 billion, the operating income for the 3rd quarter of 2011 was just $63 million, or $0.14 a share.  That’s a drop of 73% from the previous year, and was far under estimates of $0.25 cents a share.  The first reports of this hit in September, and we see a massive drop, and the volatility afterwards was a result of the actual earnings report.  What happened here?

Well, there are varying opinions, but the numbers point out that while the profit margin has has fallen, revenues still continue to climb.  From $7.6 Billion in September 2010 to $10.1 Billion in September 2011.  This means it’s different than a company like Netflix, who’ve lost subscribers and revenues in the past year from poor decisions and pricing decisions.   So the theory is that Amazon is hitting a low, but is primed to recover and grow as Amazon likely continues its growth into the Christmas season.

Furthermore, there are theories that Amazon loses a few dollars on each Kindle Fire sold, and that may factor in to today’s price, but what may not be factored in is the fact that the Amazon Prime subscription service is getting hotter and hotter.  One of the biggest questions is whether this service — which now includes free movie rentals, a free book rental per month and a special two-day physical delivery service for any purchased book — will become a hot seller at $79 per year, and how much revenue that will contribute to the company.  I imagine the margins on that service are quite high.  It could be assumed that the positive support on the stock comes from people’s bullish expectations of the Kindle Fire as being a long term success for Kindle.

The Kindle Fire phone, as reported by All Things D, is also a possibility.  And as we’ve seen Amazon putting a lot of money into their infrastructure, it may mean that development of the phone will not incur as great an overall cost as the Kindle Fire did, to kick things off.  Certainly, a Kindle Fire phone plus Kindle Fire tablet combination at $400 for Christmas next year would make Apple stand up and take serious notice.

So will you be buying Amazon stock?