Amazon: HOLD if You are a Believer

Canaccord Genuity Internet analyst Michael Graham initiated coverage on Amazon.com (AMZN) last evening with a HOLD rating, predicated

primarily on the vision and mindset of it�s founder Jeff Bezos.

�We believe in this sector personalities matter. When trying to understand a company�s strategy, we believe it is crucial to have in mind an appreciation for the lens through which its CEO is viewing the world. In this spirit, we offer a few quotes from Jeff Bezos which we find informative�

�We�re just at the beginning [of the Internet] � Day One � With new technologies, it�s very tempting to think that you�re further along than you are. But usually, you�re more primitive than you think. My guess is we�re still pretty primitive. We as a society, as a civilization I doubt we have figured out the new technologies very well yet.�  Jeff Bezos, June, 2011

Our take: This is land grab time (again!)

If everything you do needs to work on a three-year time horizon, then you�re competing against a lot of people. But if yo

u�re willing to invest on a seven-year time horizon, you�re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We�re willing to plant seeds, let them grow�and we�re very stubborn. We say we�re stubborn on vision and flexible on details.  Jeff Bezos, June, 2011

Our take: We�re only 18 months into a multi-year cycle

Based on this analysis Mr. Graham believes that the pool of investors for AMZN has bifurcated:

The Believers: Those with patience and long time horizons who believe in eCommerce growth, believe that Amazon is inherently profitable, and are willing to wait for Mr. Jeff Bezos to take his foot off the investment gas pedal. We believe this group tends to put a floor under AMZN�s valuation, which has historically been around 1.3x EV/revenue. We are just slightly above this level now.

Everyone else: Those who are slightly more short-term oriented, who will trade the stock around various margin/growth tradeoffs. For example, perhaps 0% margins are acceptable in the short term as long as revenue growth tops 40%, but if revenue growth falls to 20%, this group would expect to see 2% margins.