The Madness Of The Amazon Crowd

Oct.18.12 | About: Amazon.com, Inc. (AMZN)

"Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." ~ Charles McKay, Extraordinary Popular Delusions and the Madness of Crowds

Amazon.com (NASDAQ:AMZN) might even come out and announce to the public "We have been cooking up the accounting books" and the stock would promptly shoot up. Such should be the frustration of the AMZN shorts. While most of the things that could be said about the stock have already been said on Seeking Alpha, the fact that the stock is about 5% from its all time highs in spite of continuous alarms warrants one more article.

Worsening Fundamentals: Let us get the obvious out of the way - the fundamentals. This is strictly about the stock's and not the company's as such. The EPS has been dropping faster than the rise in price per share. The watered down estimate for the upcoming earnings report on October 25th is a loss of 8 cents per share. Yes, the company is 'expected' to produce some magic in the long term because of its CEO Jeff Bezos but maybe it's time to wonder how long is long term. This stock is continually treated as the next big thing.

(The falling EPS: click to enlarge)Click to enlarge

(Source: Ycharts.com)

This obviously leads to a very bloated PE, which now stands at about 300.

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The Tablet Fight: A crowded space becomes even more crowded with the entry of Microsoft's (NASDAQ:MSFT) Surface. Though we do not believe Microsoft is going to change the world, its undeniable that it is certainly going to eat into someone's market share in the tablet space.

And with Apple's (NASDAQ:AAPL) rumored mini iPad expected to hit the stores as soon as November, the leader is set to increase its share even though it might cannibalize its own iPad a bit. Amazon has already admitted that its tablets are being sold at cost and that it aims to make money when people use its devices, not when buying it. But they still got to buy it !

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The Cooked Up Earnings Beat: This is not a knock on Amazon but on the Wall Street analysts. When a company is being loved, everything is done to present a rosy picture. The repeated watered down EPS estimates are getting a bit too frequent. The estimates are being reduced by the day and by the time Amazon reports, the expectations are so remarkably low that it's impossible to miss it.

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The Extrapolation: Amazon is expected to grow at 36% over the next 5 years according to finance.yahoo.com. While that number is almost assured to come down given how the estimates are continually revised as mentioned above, let us believe the hype for a moment. The table below shows us when the valuation will be in line with the earnings, assuming a constant stock price of $250. We obviously know the stock is not going to stay at $250 if the earnings are this good, but this is an extreme exercise. It would take 5 years for the valuation and stock price to match, assuming the stock price is the same and earnings grow at close to 40%. Next to impossible. Something has got to give in.

The Mass Psychology: Rocco Pendola is a well known writer on Seeking Alpha as well as Thestreet.com. This is not a knock on the guy and he is used as an example because a lot of readers know him, whether you agree with his views or not.

Rocco's comment below on his article captures the Amazon scenario perfectly. The fact that investors are (over) confident about the growth and have assigned an irrational P/E should worry the investors, not comfort them.

Conclusion: We conclude the article with the same quote used at the beginning of the article. "Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one". Read that last line again - "they only recover their senses slowly, and one by one". It's a waiting game at this point to see who is the first one to recover his/her senses.

Disclosure: I am long AAPL. 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.