This Stock’s Logic Defying Run Continues, but for how Long
Swati is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon’s (NASDAQ: AMZN) latest results left a lot to be desired, with the company missing on both top and bottom lines. The revenue was a touch lower than analyst estimates, but the earnings missed the consensus by a large margin.
Amazon’s revenue, though short of consensus, surged 22% to $21.3 billion. The margins improved in North America and across the globe due to a record holiday shopping in the last quarter. Moreover, the increase in sale of third party goods on the company’s website improved margins as the commission received on these transactions is directly shown as profit.
Amazon has been incurring a lot of capital expenditure to improve future profits,and this has narrowed margins. Further, it has been operating at razor thin margins to stay competitive. The major growth for the company is coming from online digital sales, cloud computing and commission from third parties, rather than direct merchandise selling. This makes the expenditures on warehouses and fulfillment centers look unnecessary as they are operating at very low margins.
Amazon keeps innovating
On Jan 29, Amazon launched Elastic Transcoder, a service for transcoding video files between different digital formats. Amazon’s transcoder will help customers by providing relatively inexpensive and swift service. It will help businesses to store video on their servers at 1.5 cents a minute which makes it $3 to store a movie for instant downloading.
Amazon faces stiff competition from Netflix (NASDAQ: NFLX) in its video streaming and TV business. Amazon though offers cheaper packages than Netflix to attract subscribers, but its limited offering of older movies gives Netflix an edge over it. Netflix has over 30 million subscribers in over 40 countries, and is clearly leading the internet television network.
Netflix has also announced 14 new episodes of the cult TV series “Arrested Development” beginning May. It will further unveil six new TV shows in February. The company will televise previous seasons of popular TV shows such as Political Animals, Revolution and Longmire. Netflix has also signed a deal with Disney which gives it exclusive rights to stream Disney’s new releases.
A look at another retailer
E-commerce is increasingly becoming mobile commerce, and this space is shared by Amazon with eBay (NASDAQ: EBAY). eBay’s mobile payment volumes were majorly up this year and it has 206 million mobile users, 35% more users than Amazon’s 152 million users.
eBay’s PayPal processed payments totaling $14 billion, a 250% growth in volume compared to last year. Further, it has entered into a partnership with NCR Corp. to develop apps which will help customers’ pre-order food. PayPal’s partnership with NCR will open a tremendous opportunity to enter into the physical world via ATMs. Moreover, eBay looks cheap at a P/E of 17 when compared to its peers having a P/E of around 47. At a P/S multiple of 4.7 times and estimated sales of $18.64 billion for 2013, the stock has a good upside potential.
Take away advice
The numbers does not seem to have any effect on Amazon’s share price, as they keep on soaring despite the results missing estimates again and again. The share prices seem to be totally moving on investors utmost optimism in the company rather than its fundamentals. At a P/E ratio of 3100 and PEG ratio of 4.19 times, the company seems to be very expensive. Trading momentum might raise prices further but I strongly feel it is over-valued compared to what it can deliver.
swatikhanna has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and Netflix. The Motley Fool owns shares of Amazon.com, eBay, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!