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Amazon's (NASDAQ:AMZN) founder Jeff Bezos gave an incredible talk about how the internet was less like a gold rush and more like the early days of the electric industry. This metaphor has direct application, not only to the internet as a whole, but to where Amazon is headed in terms of maturity.

Amazon has been soaring and, almost universally, value investors are saying that it is too expensive as shown here, here, and here. I agree with this assessment but I don't believe fundamentals will be the reason for Amazon's ultimate decline. Amazon will deflate because of a decline in what I call threshold events but before I get to that, let's looking at an evaluation that is both technically and fundamentally based for Amazon.

Wal-Mart (NYSE:WMT), The Mature Elephant
Comparing Wal-Mart to Amazon might seem a little peculiar since one is so much larger then the other, however, both are retailers. While Wal-Mart might not have the same low margins as Amazon, what it does have is the benefit of being able to provide retail items that would never sell over the internet. Pets.com is a perfect example of the limitations of internet retailing.

What makes Wal-Mart capable of being used to benchmark Amazon is the fact that Wal-Mart could be considered to be in a mature phase for its stock (high volume and a relatively low price to book - 2.961 as of today). The reason Amazon can be identified as entering its mature phase is that it has a declining EPS and every new innovative project they launch can only affect their baseline so much. This makes it much harder to accept them as a persistent growth stock.

If we do a hypothetical consolidation of Wal-Mart's shares outstanding to the same level as Amazon, we would get a share price for Wal-Mart of roughly $509 (Wal-Mart's market capitalization / Amazon's Outstanding shares). Since Wal-Mart's shareholder's equity is about 10x larger then Amazon's (even if you deduct the 20 billion they have for "intangibles"), we could do a rough technical and fundamental approximation that Amazon should really be worth around $50 a share or 1/10th the price of Wal-Mart right now. This is obviously a rough approximation and does not account for the intrinsic potential that is currently in Amazon's share price value.

Threshold Events
Every stock has a natural variance of price motion that is created by media, short term traders, and accidental clustering of long-term sales or purchases.

Threshold events are events that push the price of a stock into a new threshold. They could be considered a breakout like event, in terms of technical analysis, but they occur completely independently of stock price motion.

Examples of threshold events would be when earnings come out better or worse than analyst forecasting or when a company releases innovative products with great potential. These events cause prices to run free of fundamentals and in the case of new or growth companies, can cause their price to increase in multiples over their fundamentals. I will explain this more below.

Amazon's Grey Hairs
A lot of what is going on with Amazon that people are calling innovation is actually an attempt to secure more revenue because their core business has hit a saturation point. There are two reasons a company branches out and tries new things. They are either trying to figure out how to monetize or they are trying to increase their baseline revenue because they have exhausted their revenue potential with their core business.

I believe with Amazon it is the second scenario. Even things like Amazon Web Services "AWS" are having a relatively low impact on their overall revenue (2B on top of 62B). Furthermore, being a developer, I can tell you that there is a saturation point for something like AWS because not all companies need that kind of granular IT services and especially with the market becoming proliferated with out of the box, zero IT involvement, products.

As Amazon's earnings fail to sparkle in comparison with their size and Amazon's stellar innovations don't come up in their earnings, all the heavy growth traders and investors will stop seeing the potential, and like all growth stocks entering into adulthood, its price to book value will slowly start to decline.

Amazon's Levitation

Here is a chart of Amazon that I am sure you have never seen before.

(click to enlarge)

In the above chart it appears that AMZN is actually in a sideways trend. For reference here is AMZN's current price data.

(click to enlarge)

The difference between these two charts is that I have discounted all negative events more negative than -5% (giving Amazon the benefit of the doubt), and exactly seven positive events. Here they are in order:

October-26-12
Change: 6.87%
Event: Earnings missed, but investors believe money well spent

July-27-12
Change: 7.87%
Event: Earnings missed, but investors believe money well spent

April-27-12
Change: 15.75%
Event: Earnings

November-28-11
Change: 6.44%
Event: Kindle Sales up

August-23-11
Change: 9.02%
Event: Court Victory on mp3tunes

April-27-11 7.86%
Change: 7.86%
Event: Earnings

January-27-11
Change: 5.17%
Event: Earnings

Even with negative values discounted, AMZN still did not form an uptrend.

One of the most prominent changes is the 15.75% gap present in the second chart. Without this gap AMZN would not be close to new highs.

The Hardest Question Answered
Why does a stock that doesn't seem to have the profitability required for a stock of Amazon's maturity continue to rise? Value investors dig into Amazon's books and still can't find any hidden profit waiting to happen.

The answer is simple, it has nothing to do with fundamentals which can be established by its 15x price to book value. It has everything to do with a minority set of events. Imagine looking at a cross section of a tree. If you were to modify the rings in the center only a bit, this change would affect all the other rings at an ever increasing exponential amount.

Levitation
For all the talk of AMZN's potential, when you remove the overreactions and in some cases sheer justification of traders and investors, the stock doesn't actually have solid accumulation going on. What has been keeping AMZN floating is what I believe to be a cult-like following. An almost religious-like zealotry that despite it having nearly 20 years to do so, it will still become the behemoth everyone truly wants it to be.

The question is not when AMZN will pull back but how resilient the investors or traders are to what is now becoming regular lackluster event results. The moment the excessive optimism stops, this stock will plummet without the support of the serious accumulators.

Bottom Line
AMZN could still levitate because when it comes to magic, AMZN is pretty good at it. However, you might seriously want to consider, at the very least, a small amount of put options.

Source: The Levitating Amazon