Top picks 2012: Amazon.com

by Stephen Quickel, editor of US Investment Report

Amazon.com (AMZN) is a controversial call that we think will bear rich fruit long-term, and should begin to ripen nicely during 2012.

The giant Internet retailer, with revenues in the $50 billion range -- ten times the sales it rang up in 2003 and twice its 2009 total -- has taken a great tumble.

It had soared from 40 in 2008 to 247 this October, with its P/E ratio frequently topping 100. And why not?  Earnings had doubled and redoubled, and then redoubled them again, since Amazon broke into the black in 2003, six years after its 1997 initial offering.

But since mid-October, to the shock of trusting shareholders, AMZN has plunged to 170 in late December.

Suddenly quarterly earnings have dipped, despite continued super-charged sales growth. And even now, with its forward P/E still at 85 times 2012 estimated earnings, there is no assurance that the stock has bottomed.

So why consider owning it? Because Amazon, quite simply, is a different kind of company than most. As columnist James Stewart of the New York Times noted recently, Amazon is one of the rare companies that "has been true to its word to manage for the long term."

That's the pledge CEO Jeff Bezos made 15 years ago when AMZN went public--and he is still doggedly pursuing, to the current discomfort of short-sighted hedge fund managers and speculative traders.

Amazon, just as it has done consistently over the years, is investing heavily in the future, with a time horizon of 5 to 7 years. And right now, Bezos sees an especially alluring future and is spending heavily to reap the long-range benefits.

Specifically, Amazon's quarterly earnings have slipped in late 2011 because it is opening no less than 17 gigantic new fulfillment centers and has been slashing prices of its Kindle e-readers and new Kindle Fire tablets.

As a result, sales are still soaring. But with rapid expansion and price cutting, AMZN is sacrificing near-term earnings in order to sell more and more content, apps and other products, which will balloon earnings as more and more consumers own its e-readers, tablets and other devices.

Amazon is also driving competitors like Borders, Barnes & Noble and Best Buy to the wall. One well-known advisory service figures predicts that earnings will revive to $9 a share by 2016.

Last year it earned $2.53, up from $0.45 five years earlier, but today analysts (according to First Call) have cut their 2011 consensus to $1.20.

However, they also project a rebound to just over $2 in 2012 and $3.72 in 2013. At today's reduced forward P/E of 85 times year-ahead earnings, this could lift AMZN above 300 ($3.72 times 85) during 2012.

If Bezos' long-term focus does generate $9 of earnings in 2016--well, pick a multiple and do the math yourself. At a mere 50 times earnings, the price could triple to 450.

 Can investors get over their disillusionment? It may take time, with a bit more price slippage. But this is not a Netflix-type of collapse, where cocky management made idiotic decisions that drove away its customer base.

Amazon, in sharp contrast, still has an eager customer base, and is making near-term sacrifices to make it grow much larger, and over the long haul sell them more stuff.

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