We all know that Amazon.com, Inc. (AMZN) is the world's biggest and most successful online retailer in terms of revenues. AMZN had worldwide revenues of $21.27B in Q4 2012 alone. For the entire year, that figure was $61.09B, which was up 27% from FY2011. However, AMZN is far from the biggest US retailer in terms of profits. In FY2012, AMZN's GAAP net income fell to $97 million for Q4 2012 (or $0.21 per share) from $177 million in Q4 2011. This figure is only 0.46% of revenue for Q4 2012. AMZN's net Income for FY2012 was -$39 million - a loss.
By comparison Wal-Mart (WMT), which recently said it intends to go into direct competition with AMZN in the online space, had total revenue for FY2012 of $446.95B. Its fiscal 2012 ended January 30, 2012, so it is not directly comparable to AMZN's. It had GAAP net income of $15.699B. This was 3.51% of revenues. In other words, AMZN does not begin to compare to WMT as a profitable retailer. Target (TGT), which has the same fiscal year as WMT, reported FY2012 revenues of $69.865B and GAAP net income of $2.929B. The net income was 4.19% of revenues.
The table below compares some fundamentals for Amazon, Wal-Mart, Target, and Google (GOOG).
Next 5 years EPS Growth Estimate per annum
Amazon and Google have the same fiscal year, so their FPE's are directly comparable. However, Wal-Mart and Target have fiscal years that end at the end of January 2013. Therefore their FPE's will not be directly comparable to Amazon's and Google's, which are currently for the year after those of Wal-Mart and Target. In comparing the PE's, AMZN does not compare well to any of the other three. When you compare the FPE's (for FY2014), Amazon will in theory catch up a lot of ground on Google. Google has Google Shopping, which it intends to expand considerably in the future. Some expect it to be a direct AMZN competitor in the future. Even so, it is not the best comparison. For FY2013, Amazon's estimated PE of approximately 150 did not compare well to any of the other three. The AMZN FY2013 estimated PE compares poorly to the current FPE's (effectively FY2013) of dividend payers WMT and TGT. It compares poorly even with GOOG's FY2012 PE.
Some might say the above indicates just how great AMZN's growth is. However, that is the blue skies view; and most seasoned investors know that the skies are seldom blue all of the time. AMZN was not expected to lose $274 million in GAAP net income in Q3 2012. It was expected to earn much more in net income in Q4 2012. Even in adjusted income, AMZN was expected to earn $0.28 per share in Q4 2012. It actually earned $0.21 per share; and that figure was substantially lower than the $0.38 per share it earned in Q4 2011.
AMZN is not even guiding well. It guided for $15B to $16.6B (the midpoint is $15.8B) in revenues for Q1 2013 (14% to 26% growth). This was below analysts' expectation of $16.86B. AMZN also forecast GAAP operating income of between -$285 million and +$65 million. The midpoint of this range is -$110 million - a loss. This compares poorly to the +$192 million in GAAP operating income in Q1 2012. When you consider that GAAP operating income is normally higher than GAAP net income, you are likely to see an even uglier figure for net income by AMZN in Q1 2013. Since PEs are based on net income, this really begins to call into question AMZN's estimated FPE. Sure you can say that the FPE will be for FY2014, so the Q1 data is not overly relevant to it. However, the near-term data does indicate that AMZN is progressing in a negative direction. It seriously calls into question the validity of the FY2014 FPE estimate of 65.09. Keep in mind that AMZN has missed even adjusted earnings estimates for the last three quarters in a row. Most consider that to be the sign of a badly managed company. Yet people are still comparing Jeff Bezos to Steve Jobs? If we see a US recession in 2013, AMZN's estimated FPE will certainly be far from valid. How far out are you willing to go with your faith in the future of this stock, especially when profits seem to be going in the wrong direction?
Anthony Scaramucci, head of hedge fund SkyBridge Capital, is towing the analysts' line. He says AMZN CEO Jeff Bezos is the current Steve Jobs. I say HAH!. Steve Jobs not only came out with almost magical products, he exceeded the markets' expectations virtually every quarter. He managed those expectations, but they were still great expectations. Now that Apple (APPL) has missed earnings expectations in two of the last three quarters, the stock has been crucified. It fell from a high of over $700 per share in September 2012 to a recent low of approximately $440 per share. That's roughly a 37% loss. AAPL has a PE of 10.39, an FPE of 9.00, a dividend of 2.40%, and a next five years EPS growth per annum estimate of 13.77%. Yet it fell!
You can't compare Bezos, who may do a good job, to Steve Jobs. That is just a scam being propagated by the big brokerages' momentum/ HFT people. They like to manipulate stocks that the public likes/loves for their own profit. Peter Lynch used to call these "nose bleed" stocks; and he refused to invest in them. You should take some of his advice. The brokerages, etc. are not pushing AMZN up for your benefit. AMZN is not reasonably valued. They are instead making huge profits by convincing the public that highly speculative propaganda amounts to a good investment strategy. Instead highly speculative propaganda is just that; and you will likely be rewarded in much the same way. If you like penny stocks, you may like AMZN. Otherwise, it is too highly valued. The disappointing Q4 2012 earnings and guidance only confirm that.
Some point to the improved margins as the real bright spot of the Q4 announcement. However, even the margins are something of a mirage. The number of third-party sellers on Amazon is growing quickly. This explains a lot of the revenue growth. AMZN is accounting the revenues from these entities as effectively pure profits. This is bringing down the Cost of Sales as a percentage of revenues (75.9% in Q4 2012 versus 79.3% in Q4 2011). This is mostly a mirage. AMZN's internal Cost of Sales are much less changed.
You could say that AMZN will just keep expanding to many different sellers worldwide. It has about 2 million now. However, that thesis overlooks the fact that other companies are starting to compete with AMZN. The recent WMT announcement is perhaps the most concerning example. There is no saying that sellers will have to sell only on AMZN. Some may decide to sell through WMT's store as it expands its online presence. Some sellers may decide to sell at both stores. For example, if you are a Dutch company selling relatively cheap clogs, you might well get much better sales from a WMT site that caters to bargain hunters. Everyone knows WMT is a bargain store. Things like this will hurt AMZN's business in the future. The company's churn rate on sellers will increase. This will increase costs. There will be other stores trying to compete with AMZN too. Target is one who might. Costco (COST) may. Stores like Carrefour and Metro AG are likely competitors in Europe. MercadoLibre (MELI) might compete in South America. I could go on. Google Shopping could expand to perform the same service that AMZN offers to its sellers.
AMZN is far overpriced (3000+ PE). If you own it, it is time to take profits. If you are an aggressive trader, it is time to short it. The Christmas season is over. There will be no great earnings surprise in near-term quarters. Plus all of the new fulfillment centers will cost almost as much money when they are seeing less goods flow through them in the off season quarters. A higher percentage of AMZN's goods sold will likely be from its own staples that are geared to every day traffic. Margins are likely to retrace for the slower quarters. This means, the quarterly reports will likely be disappointing.
If the US sees a recession in 2013, profits may really drop. Remember that the sequestration cuts were only put off until March 2013. They were not done away with. At some point, the US Congress has to stop overspending by $1T+ every year. The credit rating agencies are already harping on the US about this. The Europeans, the Chinese, and even the Japanese are too. The deficit could explode if US Treasury yields shoot up on further US credit downgrades. People are too apathetic now. Unfortunately, Bernanke seems to have convinced them that he can allow them to live comfortably no matter what. This is an illusion. Pay attention to the words of one of the wizards of Wall Street - Peter Lynch. He grew money for the average Joe or Jane. He cared. He said "don't buy nose bleed stocks."
The two-year chart of AMZN provides some technical direction for this trade.
The slow stochastic sub chart is near overbought levels again after its ramp up in afterhours trading on January 29, 2013. It is as of this writing trading at approximately $282 per share. This puts it near its top Bollinger band on the main chart. It also puts the stock price of AMZN about $25 above its 200-day SMA. This is as high above its 200-day SMA as the stock price has gotten in the last two years. The earnings news was a miss. The margin improvements that the spin doctors are pointing to are mostly illusions. The guidance is poor, and it is below previous expectations. If you love this stock, it is time to take profits. Those who initially sold the stock down to approximately $250 on the earnings report were correct in their assessment. It should go much further down than that. You can always get back in at a later time. Don't play the game of the momentum/HFT traders, you will most likely get burned.
Further, the overall market is overbought. It may want to set a new record high, which it is close to doing; but it is very close to falling. Doug Kass, who has made a lot of good market turn calls, says he is now bearish on the market (a CNBC video). Many others echo his views. High PE stocks historically fall dramatically in market downturns. A US recession, which is a strong possibility in 2013, could easily put a huge damper on the US markets. The sequestration cuts (or their alternatives) are now due in March 2013. They could trigger a significant downturn. You don't want to be in AMZN, when the overall market starts to go down. Being short AMZN at that time could be a very profitable play.
NOTE: Some of the fundamental financial data above is from Yahoo Finance.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AMZN over the next 72 hours.