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Amazon.com (AMZN), the flagship of online retailing, has customer service widely believed to be among the best in the industry. It commands a market cap of $89 billion, almost twice as much as that of eBay (EBAY). What's more amazing is Amazon's 142 price-earnings (P/E) ratio (as compared to eBay's 15). Is Amazon worth the hefty price?

I believe Amazon's stock price is getting way ahead of the company itself. It is too expensive. While I'm a bit hesitant to prescribe a "sell short" rating on a great company like Amazon, Amazon's current stock holders should definitely be very weary of this richly valued stock, and perhaps should consider selling their shares.

Chart forAmazon.com Inc. (<a href=

Amazon's core business is retailing. Different from eBay, which takes only commissions from making deals, Amazon is a retailer in a very traditional sense. As much as some people believe Amazon to be a tech company, it is not. At its core, Amazon is not that different from brick-and-mortar retailers such as Wal-Mart (WMT).

Early e-commerce models propose that Internet retailers do not have to build physical stores; therefore they have a cost advantage over brick-and-mortar stores. This turned out to be false. The shipping cost in B2C (business to consumers) style businesses is so high that it pretty much cancels out whatever cost advantage Amazon has by not having to build physical stores. For these reasons, I'm going to benchmark Amazon against the biggest retailer in the world, Wal-Mart.

Wal-Mart

Amazon

Market Cap:

208.20B

88.75B

Employees:

2,000,000

56,200

Qtrly Rev Growth (yoy):

5.90%

34.60%

Revenue:

446.95B

48.08B

Gross Margin:

25.02%

22.44%

EBITDA:

34.69B

1.71B

Operating Margin:

5.94%

1.79%

Operating Cash Flow:

24.26B

3.90B

Net Income:

15.77B

631.00M

P/E:

13.44

142.36

P/S:

0.46

1.82

Source: Yahoo Finance. yoy: year-over-year; all financial numbers are trailing twelve months.

The table above shows that Wal-Mart and Amazon have similar gross margins. This is another indicator that Amazon does not command higher pricing power than traditional retail business--It perhaps never will. When it comes to operating margin, Wal-Mart is the clear winner with almost 6%, compared to Amazon's miserable sub-2%. Revenue growth can be achieved by being a sucker seller. So it doesn't justify Amazon's value premium over Wal-Mart.

Amazon supporters argue that Amazon can significantly increase its operating margin when it finishes the recent splurge of investments in technology to boost efficiency. It is not obvious whether that is going to happen, but to be generous, let's use a different metric and not consider Amazon's luxury spending habits. We compare the operating cash flow (highlighted in the table) from these two companies.

For Amazon to keep the current market cap while having the save valuation as Wal-Mart, Amazon's operating cash flow ought to be $10.34 billion. Given where Amazon is now (OP cash flow = $3.9 billion) and how much it is growing (OP cash flow growth = 9% over the past two years), it is going to take a whopping 11 years for Amazon to reach that level.

Now we see the problem: Amazon is sacrificing its profit (or cash flow) to aggressively pursue revenue growth. Are consumers going to suddenly accept Amazon's higher price in the future? It is very doubtful. If Amazon's margin does not see significant improvement in the future, its stock price is way too hefty at the current level. Comparing to some other companies like Chipotle Mexican Grill (CMG), Amazon is actually not that overpriced, but it certainly has a very heavy expectation baggage priced in.

The verdict: Amazon stock is unlikely to yield above market average returns in the next a few years. Sell. At least do not buy it.

Source: Battle Of The Retailers: Amazon Looks Overpriced