Gregory Vousvounis'  Instablog

After reporting earnings that one would easily call a disappointment Amazon's (AMZN) stock closed today at $272.76 gaining 4.77%, while it rose up to 9% intraday. Welcome to the "Amazon Paradox".

For many investors that pick stocks based on fundamentals, Amazon's price movement has been an absurdity that brings back memories from the dot-com era when new ways to value money-losing companies were invented in order to justify their price movement.

Josh Brown had an excellent post about Amazon called "Amazon.com: Defying Logic And Physics Since 1997". He couldn't have been more on the point.

Amazon's stock has a been a headache for anyone who ever tried to explain its price movement by looking at the company's fundamentals. So you might ask what is going on with this stock? Have analysts missed something or is it just a long-lasting bubble?

Before we answer this question let's take a look at some charts that explain clearly why fundamental-driven investors believe that its price is ridiculously high.

You can easily observe that Amazon's earnings per share and its free cash flow per share are declining for years, and now have been almost wiped out completely. So it seems that investors don't buy Amazon because of its earnings or the cash it generates.

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Moving on to the next chart, you can see that the company has been consistently diluting its shareholders due to stock bonuses to its management (part of which is Amazon's founder and biggest shareholder, Mr. Jeff Bezos). Given that and the fact that Amazon pays no dividend it seems that giving back to investors isn't a reason for someone to invest in the stock.

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I believe that what drives the stock is a promise. A promise that at some point Amazon will either grow so big that it will be the online retail market itself, or that it will find a way to captivate customers and charge them with higher prices and thus increase its profit margins. The market seems to buy and hope that as long as Amazon's revenue is rising everything is ok and the company is on the path to prosperity.

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However, this is extremely unlikely for one single reason. There is no barrier of entry for anyone wanting to become an online retailer. The moment that Amazon starts to increase its margins will be the moment when the next Amazon will be born. The only way for Amazon to become a for-profit organization is to become something more than a retailer and sell its own content or products.

However there is no sign that it plans to do something like that, since every new product it launches sells at cost. As I see it Amazon is a non-profit that exists for the benefit of the consumer, its employees and its management.

So what should investors do? Well my recommendation is to stay away from the stock. Don't short it nor buy it unless it is for a trade that last up to a month. Amazon will get interesting for investors when one of the following things happen:

• The market gets tired of waiting and punishes the stock by sending it below its book value which currently is below $20 per share. A company that makes no money should worth no more that the value of its assets.
• Amazon stops growing which will cause a similar effect.
• Jeff Bezos sells his stake, resigns or decides to change the company to a for-profit organization.

Until then though, I wouldn't touch Amazon's stock with a ten-foot pole.

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. I have no business relationship with any company whose stock is mentioned in this article.

There is a saying among value investors that goes like this:

"No company is worth an infinite amount of money no matter how good it is. However, at a low enough price even the worst company can be a good investment."

There was a huge shift in investor sentiment about Apple (AAPL) after its latest earnings release. Just a few weeks ago Apple was "an extremely cheap high growth stock" according to its bulls (which is almost everyone) and anyone that was even implying that Apple is going to face trouble ahead was treated as a heretic.

But since then, sentiment has changed to the opposite direction. Now almost every analyst and commentator is talking about how tough competition is from Samsung, how Apple's growth is over and how big the risk is of it having exhausted its innovative capability.

However both of those perspectives are too extreme and single-minded to be correct. Here is what we know for certain about Apple's future:

• Apple's device sales will inevitably stop growing at some point and will be mainly driven by the upgrade cycle instead of new customer addition.
• Apple has created a loyal customer base that will frequently and regularly upgrade its Apple products.
• At some point into the future, revenue from services & software will be the main driver of growth for the company.
• NOBODY knows if it will come with a new ground-breaking product. For all we know the next product it'll introduce may be a flop or too small of a success (sales-wise) to matter. Or it may be so big that it'll dwarf its current success.

Competition has really picked-up for Apple but the smartphone market is still growing and inceasing sales hasn't become a zero-sum game yet. Even though the distribution of market share will change frequently, Samsung, Apple and whoever else comes next, can grow their sales without inflicting significant damage to each other. The same situation applies for tablets also. However, the PC market is a different story. Luckily enough though, Macs account only for 3.5% of Apple's revenue, making them nearly insignificant to its bottom line.

But how much growth should Apple investors expect? To make a long-term projection for Apple's growth, one had better be very conservative because there are a lot of unknowns concerning Apple's business and competition. However, I'm quite certain that Apple can achieve at least an average 5% growth rate for the next 10 to 15 years.

I don't expect this growth to come from devices like the iPhone or the iPad. Apple device's revenue will inevitably top at some point, mostly due to competition and market saturation. The main driver of growth for a mature Apple will be its "iTunes Software and Services" operating segment that caters to the needs of Apple's existing customers.

This is because Apple has created a huge ecosystem around its products that increases the value offered to customers and Apple's profits. This ecosystem works also as a preventing factor for Apple customers to switch to a different device. The main reason for this is that by switching, people won't be able to use all those apps that they bought and used on their iPhone or iPad.

As far as new innovations are concerned, I believe that investors should behave as if Apple has finished introducing new products. The reason for my proposition is that new products aren't something any of us can predict. Even if you know that Apple will introduce something new, you'd better take it's prospects with a grain of salt, just to be safe; even in the remote case of a flop.

If my estimate about a minimum 5% average growth rate is correct, then Apple deserves at least a P/E ratio around 15. In 2012 Apple's EPS were $44.15 and for 2013 they are expected at $46.71. Using them both as a base to calculate Apple's fair value we get a fair value range of $662 to $700 per share.

Furthermore, Apple has $146 of cash, short-term & long-term marketable securities per share and it has no debt. Just to be conservative and because we don't know if management will use this cash wisely, I'm going to discount it to $100 and add it to our fair value range which then rises to $762 to $800.

Conclusion

Apple seems undervalued by 40% compared to its conservatively calculated fair value. Before you rush in to buy though, you should consider first that this is a long-term price target. Apple's stock may fluctuate significantly and fall even further. If you are interested in building a long-term position I would suggest to keep your purchases below 10 times earnings ($440). At that price level you will have a large enough margin of safety that will protect your capital from Mr. Market's whims.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Word broke out that Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) made a bid for Nyse-Euronext (NYX). This bid was offered when NYX sent its bankers looking for alternatives to ICE's offer to buy it out for $8.2 billion or $33.12/share using stock and cash to facilitate the transaction.

Buffett's offer though had a caveat. He asked that the company be subject to due diligence for an "unspecified" amount of time and the sale of the company's European derivative business called "Liffe" at a price set by him. The company's director's according to Dealbook, estimate that Liffe's sale could have raised approximately $5 billion.

Let's do the math. We know that Buffett's price was below $30 per share or $7.3 billion. As a condition he asked the company to sell a subsidiary that is worth about $5 billion or $20/share. Furthermore Nyse-Euronext's tangible assets are worth $1.45 billion or $6 per share.

Doing the calculation ($30-($20+$6)), we can conclude that Buffett offered to buy the company for a maximum net price of $972 million or $4/share! That is less than 2 times Nyse-Euronext's expected earnings for 2013 which analysts expect at least $2.14.

Well, if you ask me, Warren Buffett is one tough negotiator! No wonder he made it to be one of the world's richest men alive.

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.