Amazon: Time to Take Profits - Barron's

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New Amazon, Same Old Questions by Dimitra Defotis

Summary: A 20% earnings beat saw internet retailer Amazon (NASDAQ:AMZN) shoot up 17% to $84 last week, even as the broader indexes sold-off more than 4%. Shares are now up an exceptional 216% over the past year, leaving them with a rich 78x 2007 earnings multiple, and 56x 2008 earnings estimates of $1.51/share -- which assumes a 41% earnings jump. Rival eBay (NASDAQ:EBAY) fetches a far more modest 21x 2008 earnings on estimated earnings growth of only 16%. Unlike brick-and-mortar retailers, Amazon's competition is always "just a click away," a factor that will forever force it to sacrifice profit margins in order to keep its customers happy. Despite this, margins have climbed over the past five years; in the past quarter they jumped 2% to 24.3%. Can its margins keep rising? One unnamed money manager thinks not: "Wall Street has extrapolated that improvement for the next five years... we really do believe there is a brutal natural limit to their margin," he says. Citigroup's Mark Mahaney agrees: He says the margin growth required to sustain its current share price are "unobtainable." He told Barron's Amazon will likely have to invest aggressively in R&D to keep its interface current, and said its music download service is incomplete. One analyst has a $65 price target, while another sees 50% downside ("keep in mind the stock was just there"). Barron's thinks investors should "take substantial profits and wait for a better deal later on."

Related Links: Q2 2007 Earnings Call TranscriptAmazon: Too Expensive, Or More To Come?Seven Reasons Why Amazon and eBay Should Merge

Amazon 29 07 2007