Would you buy, or stay out?

Amazon sells books, CDs, electronics, and a growing catalog of other goods online, and has just started letting other merchants sell through its site. It survived the dot-com crash that killed most of its e-commerce peers. Its most recent full year on file (2001) lost money, but the losses have been shrinking fast — and one quarter ago it strung together the start of a turnaround. It has never earned a profit for a full year.

• •The business is quietly turning. Sales grew 13% in 2001 and are up about 25% through the first nine months of 2002, while the operating loss over those nine months shrank to roughly breakeven. Amazon posted its first-ever profitable quarter a year ago. The line is bending the right way.
• •The balance sheet is the catch. Amazon carries $2.2 billion of long-term debt against about $1.0 billion of cash, owes more than it owns (negative shareholder equity), and pays roughly $140 million a year in interest. That interest is why the company can be near breakeven on operations and still post a net loss.
• •You can't value it the normal way. With no annual profit, there is no P/E to anchor to — you are paying $22 a share for a story about where margins go, not for earnings that exist today. The stock has nearly quadrupled off its 2001 low but still sits about 80% below its 1999 bubble peak. Bet on the trajectory, or wait for proof.