In October, I wrote an article about how Amazon.com's (NASDAQ:AMZN) shares were overpriced, and warned readers about a potential bear run. Since that article was published, Amazon shares were down 18.85 percent, as of March 9, 2012, which is a staggering loss considering the Nasdaq is up 13.25 percent during this time. In this article, I explain why Amazon shares have been bearish of late, and explain why now is still not the time to buy Amazon.
Let me start off by saying that Amazon is a great company. Its owns a lot more than just the domain name Amazon.com, including IMDb, zappos.com, soap.com, Woot, and a large stake in Living Social. For the most part, I believe that Amazon makes great strategic decisions and for the forseeable future, will be able to hold its position as the top online retailer. The only part of Amazon's strategy that I ever questioned was to sell the Kindle Fire at a loss and attempt to profit off the product through selling digital content. This idea completely contradicts Apple's (NASDAQ:AAPL) model of profiting off of its devices, and then breaking even on its digital content.
The problem with Amazon shares right now is that they are overpriced based on what Amazon will have the potential to do over the next few years. Retailing is a cut-throat industry and for Amazon to expand in terms of revenue, margins are going to have to be sacrificed. Amazon is expected to have 30.6 percent revenue growth in 2012 and 28.14 percent revenue growth in 2013, which means an increase from $48.08 billion to $80.46 billion in a span of 2 years. To make such large strides in such a short time, earnings per share are supposed to decline 5.8 percent in 2012 and then more than double from 2012 to 2013 once revenue growth begins to flatten.
Competitor Wal-Mart (NYSE:WMT), the world's largest retailer, currently has a market cap of $205 billion with about $450 billion in annual revenue. Amazon has a market cap of $83.9 billion with annual revenue currently around $48 billion. Although Amazon's business model may cut down on operating expenses long term, it would probably need to make about $150 billion in annual revenue in order to justify its stock price through means other than long term growth expectations. That could take upwards of 6 to 8 years, and it's definitely not worth the wait right now.
In conclusion, Amazon is a great company, but its stock price has been artificially inflated for some time. I believe Amazon would be a good buy at around $140, which is about 24 percent less than its current stock price. I believe that Amazon's price will adjust over the next year by continuing to perform bearishly, and will eventually become a great portfolio stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.