One thing that never ceases to amaze me about investors is that they simply don't seem to learn much from one collapse (be it in an individual name, a whole index, or the entire financial system) to the next. Time and again the idea that "this time, or this one, is different" seems to consistently win out against both past experience and common sense.
An article was published Wednesday on TheStreet by Richard Saintvilus entitled "Why It May Be Time To Sell Amazon". While the article intends to make the case that the shares are overvalued, it comes across as grossly understated, especially given Saintvilus's biography on TheStreet, which states that he is
"a Warren Buffett disciple...[whose] investments are based on factors such as the quality of a company's management, growth prospects, return on equity, [and] price-to-earnings ratio."
Given this, one would expect that the case against owning Amazon.com, Inc. (AMZN) would be made quite succinctly and forcefully. After all, Amazon's 'growth prospects' certainly aren't very good (at least not in terms of profit) as net income fell 97% YOY in the second quarter, and the company now forecasts an operating loss of somewhere between $50 million and $350 million in the third quarter.
As for return on equity, that metric has fallen every single year except one since it was measurable at Amazon, and now stands at 8.6%, a spectacular decline over the course of the last five years (the number was 58.5% in 2007). Lastly, the TTM price-to-earnings ratio is a cool 257.
There are quite a few points one can debate about Amazon, but one of those points is not whether it is overvalued when one's definition of 'value' includes profitability. Nonetheless, Saintvilus, the Warren Buffett disciple, says the following just a few paragraphs into the article:
"...over the past five quarters Amazon has logged an average of 38.5 percent revenue growth, while net income has dropped by an average of 54 percent annually during that same span. Should that be cause for concern? Perhaps, and perhaps not." (emphasis mine)
Yes, 'perhaps not', but only if you don't think publicly traded companies have a responsibility to themselves, to their employees, and to their shareholders to actually make money. Saintvilus continues,
"It seems that these figures have not gone unnoticed by some analysts. [As] average estimates...continue to fall...what normally follows is a drop in the price of the stock. But it depends on whom you ask and through which lens he/she is looking."
No it does not. There is no lens through which one can look where being unprofitable will not eventually result in a collapse of the stock price. But perhaps the most far fetched part of the analysis is the constant comparison of Amazon to Apple (AAPL) and Google (GOOG). Apparently, because all three companies make tablets, that means they are, in Saintvilus's words, "in a neck-and-neck battle for technological supremacy." In the context of this heated battle,
"Whether or not the [Amazon] is winning depends on one's perspective."
At the end of the article, Saintvilus states that,
"at these levels and considering the lowering of EPS estimates, the stock is now too expensive. There is no way to spin this."
Ironically, he has done quite a good job of putting a positive spin on it himself. The reality is this: clearly Amazon is an amazing company that has its hands in a number of businesses and it looks set to take market share from many formally prosperous retailers by setting up niche sites to sell everything from housewares to sporting goods. Additionally, its tablets have generally been well-received.
But, at the end of the day, the company barely makes money and its shares traded at $247 as of Wednesday. This is not sustainable. With all due respect to those who have spent considerable time analyzing the company and its filings looking for problems, I advise you to not miss the forest for the trees: the company embodies the term 'overvalued'. If you have time and patience, I advise shorting Amazon all the way down.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.