Will This Giant Amaze You in 2013?

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

There is a giant in the market which has been battling with declining earnings, sky high expenses and tough competition, but it’s still showing signs of resilience. Yes, we are talking about Amazon (NASDAQ: AMZN). How can a stock give you a YTD return of 46% and still possess all these negative stats? A forward P/E of 148.94 clearly shows that investors are showing faith in Amazon and recognize it as a huge growth stock. But when you look at Amazon’s books, you are baffled by its weak position. While things looked bleak in 2012, 2103 might well be the year where Amazon starts to fulfill its investors’ expectations.

Financial Analysis

Amazon’s quarterly current ratios were 1.33, 1.32 and 1.17 in the first three quarters of 2012, showing a consistent declining trend. Net income decreased 27% in Q1, 95% in Q2, and almost 4000% in Q3. Same is the case with EPS which has gone down from $0.17 in 4Q2011 to -$0.08 in 3Q2012. A profit margin of 0.07% depicts that it hardly has any margins on its sales. Everything went down in 2012, but the matter of fact is that Amazon’s still selling for $258.66.

Valuation

Amazon’s e-commerce business constitutes about 89% of its sales whereas the Kindle and Cloud service take 10% of its sales’ share. Amazon’s main competitor in the e-commerce business is eBay (NASDAQ: EBAY). In case of cloud service, its major competitors are Rackspace (NYSE: RAX) and Salesforce (NYSE: CRM). Amazon’s cloud service takes 3% share of its sales. As compared to eBay and RAX, Amazon’s EV/EBITDA is on the higher side because of its low excess cash. Its cash per share is $11.59 which is only 4.5% of its share price. Moreover, its book value per share is 16.67 which is only 6.5% of its current share price. This low BV/share makes Amazon extremely risky at the moment. Low BV means a higher P/B, this in turn shows that Amazon’s trading at a price much higher than its BV. Having said this, its EBTIDA is only $2.09 billion when compared to eBAY’s $3.93 billion.

Company

Forward P/S (1yr)

EV/EBTIDA

P/B

EV/Sales

Cash/Share

BV/Share

AMZN

1.59

53.53

15.50

1.95

11.59

16.67

EBAY

4.38

16.08

3.41

4.70

7.06

15.39

RAX

6.76

27.43

13.28

8.24

1.88

5.71

CRM

6.64

269.72

11.50

8.40

4.26

14.67

 

With 27.5% sales growth for 2013, Amazon’s still trading at a forward P/S (1yr) of 1.59x, which is far less than the e-commerce and cloud industry. Even at this high price, bulls are of the view that this low forward P/S makes Amazon an attractive buy in the industry. In order to cash in on these huge investments, Amazon would have to do really well in 2013.

What 2013 has in store for Amazon?

Kindle Devices with airbags

Recently, Amazon won a patent which would enable the company to put airbags in its latest Kindle devices. As a result, its Kindle devices would be able to survive a fall to some degree. However, the company hasn’t announced whether it would be using this latest technology in its forthcoming devices or not. The company is confident that this new innovation will certainly help increase its Kindle sales in the future.

EU e-book pricing battle

Moreover, Amazon has just won an EU e-book pricing battle with Apple (NASDAQ: AAPL) and other major publishers. This would allow the company to sell its e-books at a far cheaper rate than its competitors. Cheaper e-books mean more sales, which in turn will generate more income in the coming years.

Shipping Costs

As the U.S. is all set to become the biggest oil producer in the world by 2015, oil prices may well be on the decline in the next few years. This will have a major impact on Amazon’s shipping costs. Lesser shipping costs mean hihger gross margins, which will turn into higher net profit.

International Kindle Stores

During the last two years, Amazon opened its Kindle stores in France, Italy, Germany, Japan and Brazil. Investors, who are still bullish about the stock, are of the view that these huge investments will eventually pay off in the coming years and Amazon will start to mint some healthy profits.

This was confirmed by Amazon’s CFO, who recently said that they are selling Kindle at a cost and aren’t making any profits on the tablet. The long term strategy is to sell more e-books and video games through Kindle. So, even if they aren’t making profits on Kindle today, they will eventually in the long run.

Conclusion

According to the bulls, 2012 was a year where Amazon made some heavy investments on an international scale, therefore it shouldn’t be seen as a year of profits. Instead, 2013 would be the year where the company would start to cash in on these investments. But will it be able to grab the bull by its horns? As far as 2013 is concerned, the answer might well be “no.” More and more competitors are inundating the tablet market, making the competition even tougher. So, even if Amazon starts generating income on Kindle, it would be shared in the tablet market. Amazon’s sophisticated gadgets (gadgets with airbags), along with International Kindle markets, will generate healthy income in the next year, but it won’t have a significant impact in the short term.

The company needs more time to cash in on its long term strategy of selling e-books and video games through Kindle devices. Books, DVDs and Music constitute 22.7% of Amazon’s products so, selling them through Kindle is a great idea in the long term. As far as selling e-books in the EU is concerned, it will certainly generate more profits in 2013 (thanks to EU pricing battle) as compared to 2012. Reduction in oil prices is certainly a realistic possibility, but it’s a distant call, as the oil prices are expected to decrease at a very slow rate till 2015. The bottom line is that all these factors will ultimately have a positive effect on Amazon in 2013, but to a small extent. Hence, Amazon would certainly perform better in 2013 than it did in 2012, but it still needs 2-3 years before its investments start to pay off significantly. In short, be patient and hold Amazon for a longer period of time.


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, eBay, Rackspace Hosting, and Salesforce.com. The Motley Fool owns shares of Amazon.com and Apple. 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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