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There has been a lot of controversy surrounding Amazon (AMZN) lately, especially on this site. This brings up one simple matter; should we buy, sell, or hold this stock? I have taken the time these past couple of days to see what the buzz is all about and whether we should get in, get out, or sit tight. There is no doubt this stock has been attractive the past couple of years; this is made prevalent looking at its rise from $30 to $200 within four years. What I will attempt to explain is whether or not its run is truly up, or if this is just a bump in the road.

The Buzz

Amazon.com, Inc. (AMZN) is a customer-centric company for three primary customer sets: consumers, sellers and enterprises. In addition, the company generates revenue through other marketing and promotional services, such as online advertising, and co-branded credit card agreements. AMZN has virtually unlimited online shelf space, and can offer customers a vast selection of products through an efficient search and retrieval interface. The company personalizes shopping by recommending items which, based on previous purchases, are likely to interest a particular customer. Key features that the site also offers include: editorial and customer reviews, manufacturer product information, secure payment systems, wedding and baby registries, customer wish lists, and the ability to view selected interior pages and search the entire contents of many books.

In addition to selling a broad range of new products, AMZN also allows other businesses and individuals to sell new, used and collectible products on its Web sites through its Merchant and Amazon Marketplace programs. Like eBay (EBAY), the company earns fixed fees, sales commissions, and/or per-unit activity fees under these programs. AMZN also serves developers and enterprises of all sizes through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable virtually any type of business. The current market price is $185.54 with a general analyst consensus for a one-year price target of $216.77. This represents a 16.83% upside potential and this stock is surprisingly safer than the market given its beta of 0.55.

The Numbers:

IndexS&P 500P/E135.43EPS1.37Insider Own19.46%Shs Outstand455.07MPerf Week-1.14%
Market Cap84.43BForward P/E68.97EPS next Y2.69Insider Trans-0.07%Shs Float366.54MPerf Month3.71%
Income632.00MPEG5.02EPS next Q0.08Inst Own68.31%Short Float1.92%Perf Quarter-12.16%
Sales48.08BP/S1.76EPS this Y-45.82%Inst Trans-0.61%Short Ratio1.10Perf Half Y-6.46%
Book/sh17.04P/B10.89EPS next Y105.34%ROA2.92%Target Price213.22Perf Year-0.36%
Cash/sh21.04P/C8.82EPS next 5Y26.99%ROE8.65%52W Range160.59 - 246.71Perf YTD7.19%
Dividend-P/FCF40.36EPS past 5Y25.02%ROI6.85%52W High-23.08%Beta1.01
Dividend %-Quick Ratio0.84Sales past 5Y35.03%Gross Margin22.44%52W Low18.18%ATR5.71
Employees56200Current Ratio1.17Sales Q/Q34.62%Oper. Margin1.79%RSI (14)55.23Volatility2.10% 2.77%
OptionableYesDebt/Eq0.00EPS Q/Q-57.82%Profit Margin1.34%Rel Volume1.22Prev Close185.54
ShortableYesLT Debt/Eq0.00EarningsJan 31 AMCPayout0.00%Avg Volume6.42MPrice189.78
Recom2.10SMA201.40%SMA502.83%SMA200-6.20%Volume2,182,565Change2.29%

The Competition:

Price

Market Cap

Revenue

Gross Margin

Net Income

AMZN

185.54

84.43B

48.08B

22.44%

631.00M

BKS

13.06

758.32M

7.01B

26.40%

-65.38M

EBAY

33.03

42.5B

11.65B

70.30%

3.23B

Industry

-

162M

357.96M

36.25%

-

BKS - Barnes & Noble, Inc.
EBAY - eBay, Inc.

AMZN's year-over-year revenue growth of 40.6% is the highest within its Discount Stores Industry. The verdict: the company appears to be overpriced on the surface, compared with its peers.

The Good

Amazon has a healthy balance sheet that provides flexibility for growth, acquisitions, and share buybacks. AMZN is uniquely positioned to benefit from the continued shift in commerce from offline to online. I like the fact that the company is also leveraged to two of the fastest growing platforms on the internet; online search and the Chinese market. Amazon continues to offer new products and this helps customers in both buying efficiency and loyalty. A growing amount of stores seem to be closing up shop and keeping their online markets open, thus the internet shopping world has just scathed the tip of the iceberg. We notice this more and more with online stores like Zappos, Half, Overstock (OSTK), etc. Amazon is in a great position to capitalize on this growing market, especially considering its $9.58B cash on its books and only $1.81B in debt. For fiscal year 2012, analysts estimate that AMZN will earn $1.25. For fiscal year 2013, analysts estimate that AMZN's earnings per share will grow by 113% to $2.66, which would shoot the share price back to its 52-week high of $246.71. The sheer size of the market is the biggest advantage for Amazon, In 2010, only about 8% of total U.S. retail sales were estimated to be e-commerce transactions, totaling $176 billion. Forrester Research anticipates that figure will rise to 11% by 2015, to $279 billion. Another opportunity is the growing use of the Internet internationally, with penetration rates at 27% at the end of 2009, according to InternetWorld Stats. Looking at these facts it seems Amazon might be a good buy for long-term growth.

The Bad

The increasing market, which is an upside for the company, might also be a downside. Increased competition from traditional retailers could force intense pricing pressure and advertising rate inflation. The struggling global economy is a negative factor as well. If the global economy continues its dangerous dance with recession consumer demand could adversely impact earnings. Due to the economic woes, investors have seen significant volatility in shares throughout the past couple of years; this is due in part to its short-term variability in revenue growth and profitability. The fact that Amazon needs to capitalize on the global market also leaves it vulnerable to Forex volatility. Also, although earnings are expected to recover in fiscal year 2013, earnings per share have recently spiraled downward, coming in at just 39 cents a share in Q4, down from 93 cents per share in Q4 of 2011. Amazon's EPS averaged -46% over the last 3 quarters and during this period the company was aggressively repurchasing stock in the attempt to drive up valuation. Bottom line is Amazon grew too much too fast and its current EPS and P/E reflect this. The question is how much will this stock fall to be priced accordingly?

Conclusion

It seems the pessimism mostly lies in the valuation and the optimisms lies in the "optimistic" expectations. I do not think I will be buying this stock anytime soon even thought the consensus recommendation is "buy" or "strong buy." I believe the high hopes and expectations are achievable, but only if the company starts showing a consistent pattern of growth. I will hold off on this stock for the time being and would recommend the same.

Source: Amazon: Buy Or Sell?