Amazon Bulls, Calm Down

Wall Street is apparently thrilled with the third quarter earnings report from online retailing giant Amazon.com (AMZN), as judged by the stock's $4 (12%) jump in yesterday's session. While I am not long the name, if I was, I'd be trimming it.

Amazon is a retailer, plain and simple. Therefore, the current P/E multiple the stock garners is

quite ridiculous. Back in 1999, the bullish argument for the company centered around the idea that without physical stores, Amazon could earn much higher margins than a Borders (BGP), or a Best Buy (BBY), or a Wal-Mart (WMT).

That thesis, however, has proved to be incorrect. Amazon's margins are not any better than your traditional big box retailers. In fact, Amazon's operating margins trail those of Target (TGT), Wal-Mart, and Best Buy. Turns out that warehouses carry the same costs as actual storefronts. With most retailers trading at less than 1.0 times revenue, Amazon trades at closer to 1.5 times.

The company's growth rate does exceed its competitors, for now anyway. Since Amazon has only been around for about a decade, they can roll out new products for a while before becoming mature enough to truly become a one-stop shop for everything. That said, I don't see how the company deserves a P/E multiple of more than 25 or 30 times earnings, as their growth should slow to below 20 percent going forward.

Right now shares of Amazon trade at about 80 times this year's expected earnings [view stats]. Even if the company can grow the bottom line by 67 percent, as investors are expecting (that sounds optimistic to me), we're still looking at a 2007 P/E of more than 50 times. I just don't know how anyone can justify such a lofty price for the stock. If you think I'm wrong, please share your views.

AMZN 1-yr. chart

Related:

Amazon Q3 Conference Call Transcript

Analysts Still Hate Amazon

Amazon Struggling Against Independent Toys "R" Us

Comments

[WS:]

I agree with you 100%, and yet I'm still a huge fan of AMZN. I've been saying since the 1990s that it's a retailer, and NOT a tech company, so it is nice to hear someone ELSE say that. They do have a big tech slant as compared with their traditional rivals (BGP, WMT, etc.). And therefore they do deserve more of a retailer's P/E, although maybe slightly higher due to this tech slant. But what I like about the company, and always have, is Bezos's attitude. He says, and always has, bluntly to all who will listen, that he is NOT running the company for the share price. That will come in time. With any well-run company, there are growing pains in the beginning. AMZN has had its share, but it is slowly getting over them as it matures. They are not over, as clearly evidenced 3 months ago when the price plummeted due to ... whatever the market was unhappy with THAT time. But the company is growing into a really viable long-term organization with potentially a LOT more capabilities to take advantage of than its traditional rivals. So we'll see how AMZN does over the next 10 years, and then compare it to those rivals over their first 20 years of difficult growth. I have always loved this company, and am in it for the long haul.
Warren

2006 Oct 26 08:37 PM