This Just In: Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best ...
For weeks now, news coverage of Amazon.com (NAS: AMZN) has been "all Kindle, all the time." But don't let the headlines mislead you. Shocking as it is to hear, there's actually more to Amazon than just its new "Fire" tablet computer. These folks also sell books. And DVDs. Electronics. Clothing. Groceries, for heaven's sake! And according to the smart stock pickers at Stifel Nicolaus, it's this Web retailer's skill at selling all this stuff that's the real story. And it's the reason Amazon.com is a buy.

Amazon: Flooding the market with bargains
Yesterday, Stifel broke with the pack of naysayers who've blasted Amazon's decision to sell its new tablet PC below cost. On the one hand, Stifel argues that Amazon will almost certainly make up any money spent on this loss-leader by attracting new subscribers to its Amazon Prime product. By creating a product that facilitates consumption of "free-streamed" videos, Kindle Fire "may reinforce the advantage Amazon enjoys with Amazon Prime."

On the other hand, Kindle Fire is really tangential to Amazon's core business, which centers on selling products to consumers at great prices. In a rough economy, Stifel thinks Amazon's "low cost position" will help it garner an outsized share of whatever retail sales do happen. Target (NYS: TGT) may give discounts to holders of its branded charge cards, and Wal-Mart (NYS: WMT) may offer "always low prices," but between free shipping and tax-free sales, Amazon usually manages to offer the best prices to online shoppers. This has Stifel thinking the company will grow sales to $48.8 billion this year, then rocket to $64.8 billion in revenue next year.

Longer term, Stifel sees the company growing "30% organically for the next two years, even in a low or no-growth environment" for the economy as a whole. Valuing the company on a 1.4 multiple to these forward sales, the analyst believes Amazon is worth $280 a share today. But is Stifel right?

Let's go to the tape
There are several reasons to give Stifel's opinion credence. Perhaps first and foremost is Stifel's record of success in the Internet and catalog retail space. Over the four years that we've been tracking this analyst's performance in the industry, Stifel has racked up an astounding record of 80% accuracy on its Internet retail picks, including a series of "double-down" winners such as the ones in this chart.

Blue Nile (NAS: NILE)

Outperform

**

22 points (picked twice)

Overstock.com (NYS: OSTK)

Underperform

*

33 points (picked twice)

priceline.com (NAS: PCLN)

Outperform

*

161 points (picked twice)


Stifel's also correctly made prescient picks on Amazon itself -- on multiple occasions -- and it's been right every single time. Given this record of success, I can't dismiss even such an astounding claim as the argument that Amazon might grow 30% or more in a market that's showing no growth whatsoever, overall. I mean, when you think about it, even at $40 billion in annual revenue today, Amazon still controls just a sliver of America's $10 trillion consumer economy. If Stifel's right that Amazon's low-price strategy will continue to gain market share, I actually can see how the company could keep growing sales at 30% for one year, two years -- quite a few years, actually. Just because the Dow (INDEX: ^DJI) seems to be going nowhere but down lately, that doesn't mean Amazon can't keep going up.

And yet ...

Valuation still matters As much as I respect Amazon as a business, and as much as I respect Stifel as a picker of good businesses, I just cannot bring myself to invest in Amazon today. The reason: price.

You see, Amazon might be famous for the low prices it offers to shoppers -- but its stock price offers no such bargain to investors today. At more than 90 times trailing earnings, and more than 50 times trailing free cash flow, I'd be hard-pressed to justify paying these prices even if Amazon does grow at 30% per year from here to infinity. When you add to this the very real risk that Amazon's growth will slow at some point -- the Kindle might mis-Fire or revenue-starved states might expropriate Amazon's sales-tax-less business model, for example -- I still think the price is too high.

One way or another, we'll eventually see Stifel proved right, and Rich proved wrong -- or vice versa. Follow the story of Amazon's rise (or fall) on your personalized Fool news feed:Add Amazon.com to your watchlist today.

At the time this article was published Fool contributorRich Smithdoes not own shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 268 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Wal-Mart.Motley Fool newsletter serviceshave recommended buying shares of priceline.com, Wal-Mart, Amazon.com, and Blue Nile, as well as creating a diagonal call position in Wal-Mart.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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