Expansion plans look bright for Amazon and its investors

Shares of Amazon.com (Nasdaq: AMZN) almost always seem overvalued, but those waiting for a big pullback often end up just watching the stock keep rising. Indeed, the company, raking in more than $90 billion annually, recently sported a market valuation of about $200 billion.

The company’s latest earnings report offers a lot for investors to like. Its $5 billion Amazon Web Services cloud computing business, for example, saw revenue surging 49 percent year over year in the last quarter. Its business model of generating billions in sales without having to staff and maintain costly brick-and-mortar stores is powerful.

Some may get nervous that Amazon’s bottom line has been in the red for most of the past decade, but that’s largely due to the company choosing to invest heavily in its future.

Investors will benefit far more by taking a position in Amazon’s multidecade expansion than worrying about its possible stock price a year from now. (The Motley Fool has recommended and owns Amazon.com.)

Ask the Fool

Q: What factors should I examine before deciding whether to invest in an exciting, growing company? – I.C., Worcester, Massachusetts

A: For starters, look for competitive advantages, such as a strong reputation, powerful brands, valuable patents or economies of scale. Here are some more considerations:

On the balance sheet, you don’t want to see inventory levels or accounts receivable growing faster than sales, as that’s a red flag. So is steep or quickly growing debt. Two companies with similar income statements (showing revenue and profits) can have very different balance sheets (showing cash and debt, among other things).

Examine the statement of cash flows, to see how the company’s cash is being generated. Ideally, most cash should come from ongoing operations – the stuff produced and sold – and not from the issuance of debt or stock or the sale of property.

Also look at the company’s profit margins (gross, operating and net). Higher margins suggest that a firm has a proprietary brand or technology it can charge more for. Finally, assess how attractive the price is. You can get a rough idea by comparing its price-to-earnings (P/E) ratio or price-to-sales ratio to its five-year average, which you can find at Morningstar.com. (Enter the company’s ticker symbol and then click on the “Valuation” link.)

Q: What’s a “block trade”? – G.B., Owasso, Oklahoma

A: It’s a big buy or sell order, generally involving at least 10,000 shares of stock or $200,000 worth of bonds. Block trades are usually placed by institutions such as pension funds or mutual funds, and they’re often privately negotiated sales between two such parties.

My dumbest investment

I bought 1,000 shares of America’s Energy Company for about $5 per share. I would have fared far better, in terms of personal satisfaction anyway, if I had given that $5,000 to the people living on the streets of Seattle! Today that stock is worth nothing. – N.B., Seattle

The Fool responds: We’ve long urged investors to avoid penny stocks – those trading for less than about $5 per share. America’s Energy at the time seems to have been a borderline penny stock. A close look at its financial records might have tipped the scales firmly into penny-stock territory, if you found little in the way of revenue and earnings growth.

Many penny stocks are companies with more story than actual business results. Easily manipulated because they’re so small with relatively few shares, they’re often “pumped and dumped” by fraudsters who have hyped them.

Here’s what someone was saying about the company online in 2010. Learn to spot and disregard language like this, promising all-but-guaranteed massive profits: “America’s Energy Company projects its revenues will soar to $4.3 million a month … this is sufficient to propel … shares (to) triple what you can get in for now.

“Should America’s Energy Company close (a possible) deal, it will instantly move to the top tiers of U.S. coal companies. … All totaled, that puts the prospective value of America’s Energy Company coal resources at $703.75 per share.”