Amazon: Great Business, Terrible Valuation

| About:, Inc. (AMZN), Inc. (NASDAQ:AMZN) operates as an online retailer in North America and internationally. It operates retail Web sites, including and The company serves consumers through its retail Web sites and focuses on selection, price, and convenience. It also offers programs that enable sellers to sell their products on its Web sites, and their own branded Web sites.

I know many of you are wondering why I would even suggest shorting a name such as Amazon. With the ever changing world, consumers are opting in to purchase products through online retailers buying everything from electronics to even groceries. The ease of use has allowed companies like Amazon to grab market share from companies such as Best Buy (NYSE:BBY). Big box stores like Best Buy and hhgregg (NYSE:HGG) are taking a hit as stores are not offering competitive prices. Same store sales have been down YOY. Amazon is a very profitable company, but is simply a terrible investment due its high valuation.

Amazon has a forward P/E of around 65. Significantly higher than the average S&P 500 P/E of 20. I believe the company still has growth left in them, but not as much as market thinks. The big item Amazon has going for them is the Kindle. The nifty little e-reader has allowed readers to carry all their books in one small device. Sales of this product will grow, but the margins on it are very small. iSuppli, a market research firm estimated that the cost to make a Kindle 3G cost about a $155. Amazon has not released its margins for the product, but the overall operating margins have been disappointing.

What's more interesting is that even after disappointing earnings, the stock has been pumped up by investors. In the last quarters, the companies profit fell, but the fact that the company had higher revenues drove the stock up over 6%. Even in April the company reported a 33% decrease in profit compared to 2010. They even gave a weak guidance saying that the company foresees a 93% decrease in operating margin. This greatly concerns me that the company is not seeing a boost in their bottom line. The market should value both top and bottom line equally. A company with a high P/E ratio such as this needs to see an increase in both.

Amazon is a very profitable company and should continue to remain that way, but the issue is that with slowing growth and diminishing margins, the fundamentals cannot justify such a valuation. If you are looking for an online retailer play, I recommend eBay (NASDAQ:EBAY) as it has a cheaper forward P/E of 12.6 and plus you get their PayPal payment business which has been doing strong. PayPal has already begun integrating its payment system in many online retailers.

Amazon should have a maximum P/E of 30, which would imply a price range of $70-100. This is well below the current market price of $200. I believe Amazon is a great short candidate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.