Love Amazon the Company, But Can't Stand the Stock Here

You thought Scylla and Charybdis, the original rock and a hard spot (in the form of a whirlpool, according to Homer's Ulysses) were in the Mediterranean, didn't you? No, I fear they are on either side of a fine company with an inflated stock price: AMAZON.COM (AMZN).

I love the Internet. I use it for just about everything these days in terms of research, purchasing, strategic alliances, etc. I embrace the Brave New World gleefully. But if the Emperor has no clothes, somebody's got to step up and say so. There's a difference between liking a company's business plan and liking their valuation level. The former is an absolute necessity before I look further; the latter can cause me to wait and advise re-entry at a lower price.

I do like AMZN's style of doing business -- it's more fun than Hammacher Schlemmer and the recently-departed Sharper Image put together. They offer great stuff, fabulous service, a handy clearinghouse for actual users' reviews and opinions, and eminently fair prices. But at this point I have to say I love Amazon -- but I can't stand the stock.

At today's close of $80.10, the stock is priced midway between its high of 101 and low of 37 over the past 52 weeks at which price it sells at a trailing 71 times earnings! And you're paying this not for a company with a possible cure for cancer or a way to end the Social Security crisis, but for a retailer -- basically, stripped of all the bells and whistles, it is a firm that sells stuff through the mail. Just like Hammacher Schlemmer and Sharper Image.

Comparing these numbers to the other current retail darling, WAL-MART (buying premise: in tough times, people buy cheap, not expensive) AMZN's PE of 70 is nearly four times WMT's 17. We can't have it both ways -- people are either going cheap or they're going cool. I'm guessing cheap will win out, at least in 2008. But, you might say, they'll clearly make it up in following years, right? Not so fast. AMAZON is a fast grower, all right -- their earnings growth rate is 38.7% this year. That means, on the $1.12 TTM (trailing twelve months) earnings they've declared, if they can increase it at 40% this year, they'll declare somewhere around $1.58 this next year. If buyers still shop till they drop. And if they do it on AMAZON. And if AMZN can continue to deliver those margins without having to heavily discount their merchandise or increase their advertising and marketing expense.

Lower gross margins and higher marketing expenses are not a recipe for continued outsized growth. Then there's the slate of lesser competitors that have grown up around AMAZON. None can match it for size, but the mythical "First Mover Advantage" is just that. If first in the marketplace was a compelling advantage, we'd still be buying Duryea cars and Sperry computers and Altair PCs. Or spending hours a day on eBay.

I still love AMAZON the company and still plan to check their prices whenever I buy any major item. Except for one -- I won't be shopping for their stock until I see it at about half that PE...

Disclosure: No positions

Comments

[fxtrader07]

I regard AMZn as overvalued, too. But i still expect them to report a very solid, if not really great quarter. The weak dollar will once again come to the rescue in all likelihood. It remains to be seen how their margins have evolved ex currency windfalls. That imho will decide about the direction of the next 20$ move - up to new ATH or down towards 60$
given the high institutional liking, rather small float and huge short interest I am not at all eager to go short into the earnings report

[bryanz]

Of course AMZN is overvalued... but going against them into earnings has burned me in the past so I won't be doing it this earnings. You're also simplifying their business. Yes they're a retailer but they also offer hosted solutions for small businesses and that section of their business is supposed to be doing very well. The PE of 71+ and the FPE of 50+ and the PEG of 3.2+ are all GREAT reasons to short the stock and rub your hands together greedily as you wait for the money to come to you... if too many people have the same idea though, well you know what usually happens.

[Perspective]

Joseph, you completely missed the point with AMZN. It's not just a retailer, it's a technology innovator that also has a huge retailing business. I suggest you do more than just shop around at AMZN and dive a little more into their other services. Like their new service for small businesses, not only do they serve as a virtual back end they also provide supply chain management services! They are becoming to the consummer/small business what Oracle and SAP are to big businesses. That my friend is more than just a retailer like Sharper Image. In addition they are constantly innovating on the technology side with products like the Kindle, not ground breaking but you get the idea that AMZN isn't just sitting around just selling gadgets like Best Buy. AMZN is much like google (but with less talented people) and they seem to be hitting their stride finally. It should get very interesting from here. I do hope they disappoint when they announce their earnings, I'd love to get some of their stock in the 50s.