Mad Money host Jim Cramer is bullish on shares of Amazon.com (AMZN). Analysts keep raising price targets on the stock. Bank of America/ Merrill Lynch has a buy rating on the stock and has upgraded shares to $190. Deutsche Bank raised the price target to $186. Caris rated Amazon’s shares a buy and increased its price target all the way to $190.
Let me tell you why I think that all of these upgrades are a mistake.
As a contrarian investor, I am always skeptical when every analyst jumps on board the upgrade bandwagon. Analysts tend to act like sheep. When one analyst upgrades a stock, the rest rush to follow suit. I remember all of the analysts that were upgrading tech stocks despite wildly insane valuations. I also remember television stock experts saying that Lehman Brothers was a buy when it dropped to the $80’s in 2008. Those recommendations didn’t work out too well.
Here’s what I like about Amazon. Amazon is a great growth stock with a fantastic balance sheet. The company sells just about anything that customers want to buy on the Internet. Amazon has done an impressive job of expanding its brand in North America, Europe, and the United Kingdom. The company has a disciplined growth strategy and is executing it perfectly.
My problem with Amazon is that the company’s stock is just overvalued on a fundamental basis. The company has done such a good job of increasing top line growth that investors expect the same results quarter after quarter. This past quarter Amazon reported a 39% increase in sales and 16% growth in net income. Amazon has done so well that investors have bid the stock up far ahead of its growth rate.
Amazon’s shares surged over the $165 level in after hours trading. Shares of Amazon trade at 66 times the current year’s earnings. That’s an incredibly high valuation for a company that can conservatively grow earnings at a 30% clip. Also, the company’s margins are slowly declining. They were much weaker than expecting coming in at 3 and 4%.
As much as I like Amazon the company, the stock is trading too high. I am not willing to pay the huge premium to buy its shares. I would be looking to sell shares of Amazon at the current valuation. In my opinion, shares would be a value around $108.
Disclosure: I do not own shares of Amazon.