Amazon: A Long-Term Loser On Current Business Model

| About:, Inc. (AMZN)
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Amazon (NASDAQ:AMZN) should not be an attractive asset for long-term investment. Current shareholders and interested investors should consider action for near to medium term; a short sell or short squeeze would be most advantageous. Despite recent tablet releases, nothing new has changed with Amazon. The business model is not favorable for long term growth or viability. Amazon is overvalued and overpriced in the market. The main focus seems short sighted and bound to fail in the long term as Amazon attempts to take on tech firms with established ecosystems in their respective core functions. The more promising AWS segment seems to be a non-core focus, while Amazon will eventually lose out to fierce competition as its earnings dwindle or never transpire unless drastic changes are made.

Amazon's Kindle line competes directly with Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) in the mobile computing industry. Amazon is also competing with Netflix (NASDAQ:NFLX) in the online entertainment market. Amazon's running at a premium while its margins fail to keep pace with these major firms. Amazon's market cap is around $116 billion, Apple's around $655 billion, Google's $232 billion and Microsoft's around $262 billion. In the third week of September, both Google and Apple's market price are around $700 per share, Microsoft's around $31, Netflix's around $57 and Amazon's around $260 per share. Amazon's price is a whopping 314 times earnings, Apple and Microsoft are around 16 times earnings, Google's around 21 times earnings and Netflix is around 31 times earnings.

Amazon's price-to-book ratio is around 15.5; the other firms have price-to-book ratios below 6. Amazon's 35% 5 year sales growth is second to Apple's 42%, Google is close behind at 29%. Amazons 29% sales growth in the past quarter, YOY is second to Google's 35%; Apple is next with 22%. But, Amazon's $0.82 EPS is by far the lowest, Netflix's EPS is $1.82, Microsoft's is $2.00 while Google's EPS is $33 and Apple's is $42. Amazon's 1.08 current ratio and 0.68 quick ratios are also the lowest; Netflix's current ratio of 1.43 is next while Google's 3.84 is the highest. Amazon's return on equity is 4%; both Netflix and Google are around 19%, while Microsoft is 27% and Apple is 44%.

Amazon's 1.17% operating margin and 0.60% net margin are the lowest by far. Netflix's margins are 5% and 2.87%, respectively, Google's are 30% and 25%, Apple is 35% and 26.9% while Microsoft's operating and net margins are 29% and 23%, respectively. Despite these dismal earning margins, Amazon's stock price has increased 49% YTD through mid-September; only Apple's 73% YTD increase was higher. Amazon's beta score is close to one and its average daily volume is around 3 million shares. The premium pricing, insufficient margins and low volatility and trading volume should raise some flags for current shareholders or interested investors. Amazon's price has increased by around 12.7% since its last earnings release.

Amazon's recent earnings release clearly depicts why its margins are so low. Total second quarter net sales increased 29% YOY to $12.8 billion. Total operating expenses were $12.72 billion, increasing from $9.71 billion, YOY. Second quarter net income was $7 million, decreasing from $191 million, YOY. First half net income decreased to $137 million from $391 million, YOY. North America accounts for 57% of Amazon's revenue. Amazon's net shipping costs increased 20%, YOY and account for 4.6% of Amazon's net sales.

Amazon expects net shipping costs to continue to increase. Media accounted for $4.1 billion while electronics and general merchandise accounted for $8.1 billion of total net sales. Amazon has operating and capital commitments amounting to $943 million in 2012, $1.6 billion for 2013 and $8.2 billion in total. Amazon's free cash flow in 2012 is $1.09 billion, down from $1.83 billion, YOY. Third quarter net sales are projected to range from $12.9 to $14.3 billion; operating income will decrease to a $350 million loss from a $79 million income, YOY.

Amazon's sales are adequate, but it earns very little on these transactions. Content is not a high margin sale, and recently, Amazon's investing in these high end novelty tablets at a loss with a plan to recoup earnings on the content sales after purchase. Amazon isn't dominating the tablet market either; Apple still has around 70% market share. The latest Kindle launches seemed to be in response to directly compete with Google's Nexus 7 and undercut Apple's price for the iPad. But, this is only Google's first attempt at a tablet and Apple has yet to respond to the evolving market with what many expect to be a mini iPad.

If there is a lower priced mini iPad, Amazon's product will be in trouble as it struggles to gain 5% market share. Amazon thinks consumers want content, this may be true but Apple has an established subscriber base, an ecosystem and a more sophisticated product. Microsoft has yet to release its Surface tablet; MSFT CEO Ballmer was quick to point out that the Kindle is more of a novelty item, not capable of even doing homework or, more importantly, hosting business applications. It's still very early in the tablet or mobile PC industry; as it evolves, the products will become more sophisticated to improve functionality; the Kindle reader will most likely be left behind as inferior and obsolete.

If this happens, Amazon will barely recapture earnings from investing in these high-end tablets. Amazon is also faced with more and more states requiring tax revenue from e-commerce transactions. Amazon could invest in developing a store front, but this is another investment with hope for returns down the line. Amazon attempts to compete with Netflix, but Netflix has a far superior portfolio of products and it's already focused on becoming a global brand leading the streaming market. Amazon should focus more on its promising AWS platform instead of trying to compete with these large firms with extensive subscriber bases, encompassing portfolios and comprehensive ecosystems.

The Kindle tablets are somewhat of a novelty, it's early in the tablet industry and these products lack the fortitude or functionality to keep pace with what the major players can create for new customers and their established subscriber bases. The same can be said for Netflix; it's uncertain how long Amazon can continue to sustain its minority market share in these ultra-competitive markets.

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.