Internet Stocks: Amazon Overvalued, Shutterfly Won't Be Profitable

It’s been a while since I highlighted one of Zacks.com’s Bear of the Day stocks. But I couldn’t ignore today’s pick: Amazon.com (AMZN). Zacks asserts that the company’s investments in new businesses are not working out, and that the stock is considerably overvalued. An excerpt:

We remain negative on AMZN shares, due to worsening fundamentals, contracting profit margins, and deteriorating operating leverage. What’s more, the company continues to invest in new businesses, which is not translating into bottom-line growth. Given this situation, we think investors will soon begin to realize that Amazon.com does not deserve its expensive valuation. As such, we reiterate our Sell rating and $20 target price, which is roughly 30 times our 2007 EPS estimate.

Zacks goes on to assert that the company’s investments in new businesses and infrastructure is pressuring “already thin profit margins,” and its “shrinking gross margin” trend “will be difficult to reverse without negatively impacting its sales growth.”

Amazon today rose 91 cents to $32.61.

Meanwhile, Alan Meckler, the CEO of JupiterMedia (JUPM) had a provocative take yesterday on his blog about Shutterfly (SFLY), the online photo service that went public last week at $15 a share. In short, Meckler seems to think Shutterfly is a 1999-style Internet bubble stock that won’t ever make any money. Here’s an excerpt from his blog:

The company is moving in on $80 million a year of revenue and makes no money. The business is fiercely competitive. And today, after an IPO, the company has a market cap of over $300 million.

This IPO reminds me of IPOs of the 1999-2000 era. In those days companies went public on ideas with no revenue. Shutterfly has revenue but I would doubt that it can ever be profitable…

As a CEO of a public company I realize that this post might draw criticism. I am used to criticism and realize that if my own company’s financial results do not satisfy The Street then I will be condemned and reminded of this post. However we do make money - lots of it. And our market cap is now significantly lower than the market cap of Shutterfly.

I am constantly amazed by the process of being a public company. I spend hours with analysts and fund managers. They rip apart and parse my every phrase and thought about our business model. And that is why for the life of me I cannot understand how any fund manager would have purchased shares in Shutterfly at the level the company sold itself to the market.

Congratulations to the banks that brought this deal to the market and of course to the founders (many of whom sold shares on the offering). I wish you luck with your business and no ill-will. I am just a mere Internet industry commentator who has observed it all in the Internet space since 1994. We shall see where this all winds up over the next 12 months.

Shuttefly shares today are down 7 cents at $14.29. JupiterMedia is down 2 cents at $7.79, giving the company a market cap of $276.7 million.

Another take: Marketwatch’s Bambi Francisco mused that Shutterfly might be shopping for acquisitions - or alternatively, that someone might want to buy Shutterfly. (On the latter suggestion, I’m skeptical; I have to think if someone wanted to buy Shutterfly, they would have done it before the company went public.)

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[OliverMueller]

Oliver Mueller, CMFC.
Financial Advisor
Enright Premier Wealth Advisorts

www.enrightpremier.com

blog at southbaywealthadvisor..../