Amazon: Buy Or Sell?

Sep. 6.12 | About: Amazon.com, Inc. (AMZN)

There has been a lot of controversy surrounding Amazon (NASDAQ:AMZN) lately, especially on this site. This brings up one simple matter; should we buy, sell, or hold this stock? I have taken the time these past couple of days to see what the buzz is all about and whether we should get in, get out, or sit tight. There is no doubt this stock has been attractive the past couple of years; this is made prevalent looking at its rise from $30 to $200 within four years. What I will attempt to explain is whether or not its run is truly up, or if this is just a bump in the road.

The Buzz

Amazon.com, Inc. is a customer-centric company for three primary customer sets: consumers, sellers and enterprises. In addition, the company generates revenue through other marketing and promotional services, such as online advertising, and co-branded credit card agreements. AMZN has virtually unlimited online shelf space, and can offer customers a vast selection of products through an efficient search and retrieval interface. The company personalizes shopping by recommending items which, based on previous purchases, are likely to interest a particular customer. Key features that the site also offers include: editorial and customer reviews, manufacturer product information, secure payment systems, wedding and baby registries, customer wish lists, and the ability to view selected interior pages and search the entire contents of many books.

In addition to selling a broad range of new products, AMZN also allows other businesses and individuals to sell new, used and collectible products on its Web sites through its Merchant and Amazon Marketplace programs. Like eBay (NASDAQ:EBAY), the company earns fixed fees, sales commissions, and/or per-unit activity fees under these programs. AMZN also serves developers and enterprises of all sizes through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable virtually any type of business. The current market price is $247.88 with a general analyst consensus for a one-year price target of $264.07. This represents a 6.5% upside potential and this stock is surprisingly safer than the market given its beta of 0.86.

The Numbers:

 

 

Index

S&P 500

P/E

302.29

EPS

0.82

Insider Own

19.57%

Shs Outstand

452.07M

Perf Week

1.62%

Market Cap

112.06B

Forward P/E

104.15

EPS next Y

2.38

Insider Trans

0.02%

Shs Float

363.60M

Perf Month

5.49%

Income

377.00M

PEG

9.55

EPS next Q

-0.08

Inst Own

67.25%

Short Float

2.22%

Perf Quarter

16.26%

Sales

54.33B

P/S

2.06

EPS this Y

-45.82%

Inst Trans

1.28%

Short Ratio

2.58

Perf Half Y

36.88%

Book/sh

16.60

P/B

14.93

EPS next Y

209.09%

ROA

1.68%

Target Price

261.93

Perf Year

18.04%

Cash/sh

10.99

P/C

22.55

EPS next 5Y

31.65%

ROE

4.94%

52W Range

166.97 - 250.00

Perf YTD

43.20%

Dividend

-

P/FCF

101.96

EPS past 5Y

25.02%

ROI

3.29%

52W High

-0.85%

Beta

0.93

Dividend %

-

Quick Ratio

0.68

Sales past 5Y

35.03%

Gross Margin

23.30%

52W Low

48.46%

ATR

4.93

Employees

69100

Current Ratio

1.08

Sales Q/Q

29.47%

Oper. Margin

1.17%

RSI (14)

65.36

Volatility

1.79% 1.79%

Optionable

Yes

Debt/Eq

0.00

EPS Q/Q

-96.32%

Profit Margin

0.60%

Rel Volume

1.26

Prev Close

248.27

Shortable

Yes

LT Debt/Eq

0.00

Earnings

Jul 26 AMC

Payout

0.00%

Avg Volume

3.13M

Price

247.88

Recom

2.00

SMA20

3.31%

SMA50

7.35%

SMA200

21.18%

Volume

3,943,394

Change

-0.16%

Click to enlarge

The Competition:

 

Price

Market Cap

Revenue

Gross Margin

Net Income

AMZN

247.88

112.06B

54.33B

23%

377M

BKS

11.82

686.62M

7.16B

27%

-69.44M

EBAY

47.36

61.02B

13.02B

70%

3.73B

Industry

-

209.8M

309.5M

33%

-

Click to enlarge

BKS - Barnes & Noble, Inc.
EBAY - eBay, Inc.

AMZN's year-over-year revenue growth of 34.9% is the highest within its Discount Stores Industry. The verdict: the company appears to be overpriced on the surface, compared with its peers.

The Good

Amazon has a healthy balance sheet that provides flexibility for growth, acquisitions, and share buybacks. AMZN is uniquely positioned to benefit from the continued shift in commerce from offline to online. I like the fact that the company is also leveraged to two of the fastest growing platforms on the internet; online search and the Chinese market. Amazon continues to offer new products and this helps customers in both buying efficiency and loyalty. A growing amount of stores seem to be closing up shop and keeping their online markets open, thus the internet shopping world has just scathed the tip of the iceberg. We notice this more and more with online stores like Zappos, Half, Overstock (NASDAQ:OSTK), etc. Amazon is in a great position to capitalize on this growing market, especially considering its $4.97B cash on its books and no long-term debt. For fiscal year 2012, analysts estimate that AMZN will earn $0.79, and for fiscal year 2013, analysts estimate that AMZN's earnings per share will grow by 214% to $2.48, which would shoot the share price back to its 52-week high of $246.71. The sheer size of the market is the biggest advantage for Amazon, In 2010, only about 8% of total U.S. retail sales were estimated to be e-commerce transactions, totaling $176 billion. Forrester Research anticipates that figure will rise to 11% by 2015, to $279 billion. Another opportunity is the growing use of the Internet internationally, with penetration rates at 27% at the end of 2009, according to InternetWorld Stats. Looking at these facts it seems Amazon might be a good buy for long-term growth.

The Bad

The increasing market, which is an upside for the company, might also be a downside. Increased competition from traditional retailers could force intense pricing pressure and advertising rate inflation. The struggling global economy is a negative factor as well. If the global economy continues its dangerous dance with recession consumer demand could adversely impact earnings. Due to the economic woes, investors have seen significant volatility in shares throughout the past couple of years; this is due in part to its short-term variability in revenue growth and profitability. The fact that Amazon needs to capitalize on the global market also leaves it vulnerable to Forex volatility. Also, although earnings are expected to recover in fiscal year 2013, earnings per share have recently spiraled downward, coming in at just 39 cents a share in Q4, down from 93 cents per share in Q4 of 2011. Amazon's EPS averaged -46% over the last 3 quarters and during this period the company was aggressively repurchasing stock in the attempt to drive up valuation. Bottom line is Amazon grew too much too fast and its current EPS and P/E reflect this. Also, with heavy competition especially recently from Apple (NASDAQ:AAPL) I do not see this company growing anymore. Based on trailing P/E, AMZN currently trades at a >100% premium to its Discount Stores Industry peers. The question is will the stock drop again in order to neutralize the price?

Conclusion

It seems the pessimism mostly lies in the valuation and the optimism lies in the "optimistic" expectations. I do not think I will be buying this stock anytime soon even thought the consensus recommendation is "buy" or "strong buy." I believe the high hopes and expectations are achievable, but only if the company starts showing a consistent pattern of growth. I will hold off on this stock for the time being and would recommend the same.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.