Amazon.com may have trouble fulfilling high expectations

Question: I am a shareholder in Amazon.com Inc. and would like to know if the company’s stock can keep up with expectations.

Answer: The world’s largest online retailer has a reputation for low prices and customer loyalty, but it must spend a lot of money to maintain its rapid growth.

That’s how high expectations can outpace reality.

Amazon’s new Kindle e-reader models, aided by price cuts, have proved popular. One downloads books using 3G cellular networks and Wi-Fi, while the other uses only Wi-Fi. The company sells more digital books than hardcovers and intends to manufacture additional devices that use its various forms of content.

Behind the increased operating costs:

•About 2,200 employees were added in the last quarter to bring its headcount to more than 28,000.

•It plans this year to build more than a dozen large-product fulfillment centers around the world, bringing the total to more than 50.

•It is spending generously to market the Kindle and to improve the technology infrastructure that powers its Web services.

Amazon’s shares are down 5% this year after soaring 162% last year. Its second-quarter profit rose 46% as sales climbed 40%, but fell short of analyst expectations because of the higher operating costs.

Regarding e-books, attorneys general in Connecticut and Texas are reviewing agreements between book publishers and Amazon and Apple Inc. to determine whether they are anti-competitive.

The most common rating of Amazon shares by analysts is “buy,” according to Thomson Reuters, which lists 12 “strong buys,” 13 “buys,” 11 “holds” and one “sell.”

Amazon is vulnerable to consumer spending downturns, and competing digital formats could potentially make its warehouses and distribution networks less relevant. Nonetheless, it has a strong balance sheet and cash flow, leading to speculation from time to time that it might acquire a company such as Netflix Inc.

More than half of Amazon’s sales are books, movies, music and video games, with most of the rest in electronics and general merchandise.

Analysts on average expect Amazon’s earnings to rise 28% this year versus 17% for the overall online retailing industry. The company’s earnings are projected to grow at a 27% annualized rate in the next five years, versus 13% industrywide.

Question: Is there a rule of thumb for home equity loans? We realize people got into trouble with these, but we could use the extra money.

Answer: This is a frequently given rule of thumb: Your first mortgage and line of credit together should not equal more than 80% of the value of your home.

The financial crisis made standards much tougher, and most banks don’t want to lend more than that amount anyway.

Also, don’t make a habit of paying off credit card debt with your home equity line, said Rick Harper, director of housing education for the Consumer Credit Counseling Service of San Francisco. If you end up filing for bankruptcy, credit card balances and other unsecured debt will be discharged, but secured debt such as a home equity loan won’t be.

Andrew Leckey answers questions only through the column. E-mail him at yourmoney@tribune.com.