Amazon's Expansive Reach Draws Many Competitors
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon (NASDAQ: AMZN) is currently overvalued in the market according to its financials. Its fastest growing segments of the business show the most promise, but also face the most competition from major brands. As Amazon tries to grow and expand I believe it will encounter more obstacles than success. This is not a very favorable investment due to its premium stock price and potential for staunch competition on the horizon. Waiting for a dip in the stock price during the summer months between product releases could be advantageous for the oncoming holiday season.
The market cap is $4 billion more than its enterprise value; this is the first indication of its overvaluation. The beta is a little more than a half; the stock price has been steadily rising through ebbs and flows throughout the past two years. The current stock price is around $212 on the lower end of the 52 week range from $246 down to $166. The current price is above the 50 day and 200 day moving averages of $208 and $193 respectively. The price is 177 times more than earnings and the forward price-to-earnings ratio is around 80. The price is more than 13 times the book value and almost double the sales as well.
Almost all of these figures indicate that the stock price is higher than the true value of Amazon. Another downside of this investment is that there is no dividend for shareholders. The net margin, operating margin and return on equity have all decreased since 2011, while Amazon continues to trade at a high premium in comparison to its competitors. Both the operating margin and net margin are below 1.5 percent and gross margin is below 25 percent. Institutional ownership is above 65 percent while the current ratio is above one. The PEG ratio is extremely high at over 7 and the current ratio, net margin, operating margin and return on equity have all been decreasing for the last three quarters. Sales growth is down 24 percent from the last quarter but up 33 percent from the previous year.
Amazon is aggressive in looking for new customers, but no segment of its operations is in a niche it can guard from competition by major brands. As Amazon continues to expand, it invites competition from various industries while displaying a blueprint that can be duplicated by anyone in order to gain market share. Also, as it continues to grow and expand in its current operations and into other industries, it will get harder to sustain growth or capital and cash flow to maintain a significant position in any sector. As time goes on it will become harder to focus on multiple industries and thwart major competitors at the same time. I see Amazon stretching itself too thin and would wait for a dip in price before investing in its shares. The consumer retail, media entertainment and technology industries Amazon is focused on are all extremely competitive.
Amazon has just inked a three year deal with Paramount Pictures in order to expand its current archive of movies on its streaming media website. Amazon Prime Instant Video is a direct competitor with the popular brand Netflix (NASDAQ: NFLX). Amazon also has contracts with CBS (CBS), FOX, Disney (DIS) and Viacom (VIA) in order to provide around a total of 17,000 movies or television shows for customers to choose from. Amazon charges $79 per year for access, which is less than Netflix's annual premium of $95. However, Netflix has around 60,000 videos for customers to choose from. It's very unlikely that Amazon will ever challenge Netflix in this market. It's more likely that brands such as Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), or even eBay (EBAY) and Barnes & Noble (BKS) will form partnerships or innovations to overcome Amazon's market share in this sector. The capital and effort Amazon spends in this industry takes away from its core function as a retailer and other rapidly growing ventures as well.
Another example of fighting a losing battle is the mobile computation or tablet industry. The Kindle and Fire were innovative and attractive products, but now this market is inviting different competitors with more strength in the industry. Mobile computing and smart phones are the fastest and most promising industries in the tech sector. It's hard to imagine, outside of a merger or partnership, how Amazon will compete with Apple or Google once they get more focused on gaining market share in the tablet sector. There are already rumors about Apple releasing a 7 inch iPad while Amazon is moving towards a 10 inch tablet. Microsoft is teaming up with Barnes & Noble to enter the tablet industry with its software products, while Google has recently acquired Motorola for its patents and hardware capabilities. As more major brands enter the tablet industry, it is clear that Amazon is the least capable of holding on and competing with these software and hardware tycoons.
The AWS sector of Amazon's operations is rapidly growing, but eventually it will have to deal with competition from tech companies like Cisco (CSCO) or Google as well. AWS could also see reduced earnings as corporations start to invest in their own data and IT centers and utilize AWS solely for high peak loads. Amazon is also venturing into rebranding in an attempt to gain market share in the industry supplies sector. Competing with the leading vendors and experts in this sector could also leave Amazon thin on capital and cash flows in the future. I do not believe the Amazon business model necessarily translates and overcomes every type of retail opportunity. It will be harder to compete with brands in this niche, this is part of the reason Amazon is rebranding in order to make a stronger attempt at developing a presence to attract the top industry consumers.
While Amazon's stock price is fairly high right now, I still consider this an appealing investment. Ideally, I will wait for a dip in stock price during the summer months or perhaps even in early fall before the holiday seasons begins. Companies that compete with or contract with Amazon may be more appealing for more promising growth opportunities, lower stock prices and possible dividend payouts.
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