Amazon: When Will This e-Story Be Over?

Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Up and down, back and forth, you just can't kill Amazon (NASDAQ: AMZN). On Jan. 29, the giant Internet retailer reported earnings for 4Q of 2012. The company reported Net sales of $21.27 billion, compared with $17.43 billion a year ago, a sharp increase of 22%. Operating income increased 56% to $405 million, compared with $260 million a year ago. Sales of e-Books have increased by approximately 70% year over year. The crowd was quick to cheer and applaud and shares jumped as high as 7% following the announcement.

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But this does not mean that everyone is waiting in line to purchase shares of the company. In fact, the polarity between true believers in Amazon and the crowd of value investors has never been more extreme.

The bear case

When asked, value investors will quickly tell you that investors in Amazon, in today's prices, have simply given up on all value measurements known to mankind. In specific:

  1. More expensive than expensive: If you buy shares at current price, you will be paying $278.00 for $.075 of trailing earnings. That gives you an astronomical P/E of 3,200. This P/E is so high out of this world that it could compete (and win) against any Internet company in the jolly bubble era. On the book value front, things are not much brighter. At a Book Value /Share ratio of over 15x, the company is the most expensive in its industry.
  2. Profitability: although the company was able to present an impressive increase in sales, this is not necessarily translated into profits. Amazon's operating margin is still under 1% (!). Such a low operating margin means that any sudden change in the business environment will quickly swing the company to an operating loss.
  3. Management: with all of that success, the company's management has not been able to show a high return on equity and assets. In fact, they are currently resting at the 0.5% and 1.5%, respectively. But it is not only the absolutely low numbers, it is the trend that matters the most. If you rewind back to 2010, you will find that only three years ago, management was still able to produce a 25% return on equity, as well as on assets. This is no longer the case.

The bull case


Proponents of Amazon will tell you that the company is far from done:

  1. Business model: the company has a unique relationship with its customers who are absolutely in love with it. After all, if you wish to truly evaluate the brand power of Amazon, all you have to do is take a look at the demise of brick and mortar book stores, such as Barnes & Noble (NYSE: BKS). Barnes & Noble, back in its days of glory, traded at twice the price it is currently trading for. Nowadays, it is a money- losing business, trading at a paltry price/sales of only 0.11 with negative returns on its equity and assets of 4.5% and 1.5%, respectively. And B&N was the leader in book sales. You can only imagine how many other book stores Amazon wiped out completely.
  2. Short float: the short float (percent of shares held short from total number of outstanding shares) is at an extreme low. This indicates that the market is a true believer in the company.
  3. Quality comes with a price: The price tag for Amazon shares is justified by its rapid growth.

 The Fool looks ahead

Value is like gravity. Eventually, it always tends to catch up with you. I believe that although Amazon does have a viable business model, it is actually a trap in disguise: It is extremely expensive, only barely profitable, and currently cheered by too many analysts. This is the perfect recipe for disaster. 


shmulikarpf has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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