Amazon: Seeing the Forest and the Trees
Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon.com (NASDAQ: AMZN) reigns as the largest bookseller on the planet. Some analysts project that the company will command a 50% market share of the U.S. book market by the end of 2012. Amazon’s primary competitor in the space, Barnes and Noble (NYSE: BKS), is fighting mightily but has seen its net income steadily deteriorate over the past 5 years. Books-A-Million (NASDAQ: BAMM), a smaller competitor, faces similar earnings erosion. A former peer, Borders, threw in the towel altogether.
Much has been said about the battle between Amazon’s Kindle e-reader versus the Nook marketed by Barnes and Noble. Over the long run, my prediction is that the hype we read now will be irrelevant. Amazon will ultimately win. That’s not to say that the Nook won’t beat the Kindle in some features along the way. It’s just that these minor innovation victories won’t matter when all is said and done. Amazon has the deep pockets to respond to any temporary gain that Barnes and Noble attains. If nothing else, they can prevail through a war of attrition.
The bigger challenge for Amazon in the book market comes from Apple (NASDAQ: AAPL) rather than Barnes and Noble. The iPad ranks as the number three e-reader behind Kindle and Nook. Industry observers expect Apple to unveil an iPad with a smaller 8-inch screen soon. Doing so could catapult iPad into a head-to-head match against Kindle in the e-reader space. While Amazon’s financial resources dwarf those of Barnes and Noble, Apple is a different story. My guess is that neither Amazon nor Apple will dominate, but Apple will probably gain market share from both Amazon and Barnes and Noble. We can probably chalk up a minor loss for Amazon coming down the road there - not as much from Kindle sales (where Amazon reportedly takes a loss) but from e-book sales.
Viewing Amazon primarily as a bookseller is myopic, though. The company is a major force in the online video market also. The recent earnings release from Netflix (NASDAQ: NFLX) provides a hint of Amazon’s growing muscle in the video streaming market. Netflix stock plummeted after subscriber growth projections disappointed investors. Video streaming is growing in popularity, so where are the new subscribers going? One of their destinations is Amazon. The company offers streaming video as part of its Amazon Prime service currently. There is speculation, though, that Amazon might launch a standalone subscription service. Expect growth from that front in the near future.
Amazon is really like an online mall selling everything - not just books and video. It is in retail where Amazon is most formidable. There is a threat on the horizon, however. Two Republican senators have put forward so-called “E-Fairness” legislation that would allow states to collect sales taxes from Amazon and online retailers. Should this be passed, Amazon and other online retailers could lose sales to traditional brick-and-mortar stores.
My suspicion, though, is that Amazon could mitigate losses from these decreased sales by charging smaller online retailers to process sales taxes for them. Around 40% of Amazon’s online sales stem from other online retailers. Many of them would willingly pay Amazon to jump through state sales tax hurdles on their behalf.
Overall, as a company Amazon certainly has challenges but seems well-positioned to face them head-on. My concern is not with Amazon the company but rather Amazon the stock. Amazon’s trailing P/E is over 141 and forward P/E is 76. The forward P/E is at the upper end of its 5 year range. The PEG is a whopping 5.87. Compare these numbers against Apple’s 11.27 forward P/E and 0.67 PEG. Does anyone really believe that Amazon is worth more than Apple by +600%? Granted, Apple is undervalued but not by 600%. Amazon stock is simply too expensive right now regardless of what their earnings might be. The trees look good but the market is asking too much for the forest.
Keith Speights (www.keithspeights.com) owns shares of Apple. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
