Is Amazon Losing Momentum?

With shares of Amazon.com Inc. (NASDAQ:AMZN) trading at around $248.23, is AMZN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Reading this article requires a little imagination. If you lack imagination, don’t worry, here’s some inspiration

Great song, but this isn’t going the political or religious route. We’re going a much different route. Imagine you’re trapped inside a Men in Black movie and a neuralyzer has been used on you. For those not familiar with the Men in Black franchise, this means that your recent memories (and sometimes not so recent memories) have been erased. With that in mind, imagine that you have never heard of Amazon. The only thing you now know is that this is a company with weak margins, poor valuation, high sensitivity to market corrections, and it has difficulty showing profits. Would you feel comfortable investing in this company?

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Passionate Amazon longs are likely angrier than a pack of unfed and caged wolves right now. Then again, Amazon longs have seen this argument so many times that they’re probably immune to it.

On the bullish side, Amazon has shown consistent revenue improvements on an annual basis, it has superb customer service, and analysts love the stock (18 Buy, 12 Hold, 1 Sell). Amazon Instant Video also has potential. It’s cheaper than Netflix (NASDAQ:NFLX), but Netflix offers more content and better quality.

Amazon.com’s traffic has steadily increased over the past two years. On the other hand, the past three months has seen a 22 percent decline in time-on-site and a 20 percent increase in bounce rate. These aren’t necessarily bad signs, but they’re not good signs.

According to Glassdoor.com, employees rate Amazon a 3.4 of 5, which is very high. A somewhat impressive 66 percent of employees would recommend the company to a friend, and an impressive 87 percent of employees approve of CEO Jeff Bezos. It’s evident that the company culture is strong, which is a great sign as it increases productivity.

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Amazon, Netflix, and eBay Inc. (NASDAQ:EBAY). Amazon has a market cap of $112.59 billion, Netflix has a market cap of $11.94 billion, and eBay has a market cap of $67.93 billion.

AMZN

NFLX

EBAY

Trailing   P/E

N/A

515.01

25.40

Forward   P/E

70.28

69.06

16.25

Profit   Margin

-0.14%

0.65%

18.68%

ROE

-1.11%

3.31%

13.64%

Operating   Cash Flow

 $4.25 Billion

-$8.51 Million

 $4.24 Billion

Dividend   Yield

N/A

N/A

N/A

Short   Position

1.80%

N/A

1.30%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal         

The debt-to-equity ratio for Amazon is close to the industry average of 0.36.

Debt-To-Equity

Cash

Long-Term Debt

AMZN

0.36

$7.90 Billion

$3.04 Billion

NFLX

0.62

$1.03 Billion

$500.00 Million

EBAY

0.21

$9.40 Billion

$4.52 Billion

 

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T = Technicals Have Weakened  

Amazon has been a big winner over a three-year time frame, but the year-to-date performance has been subpar.

1 Month

Year-To-Date

1 Year

3 Year

AMZN

-6.96%

-1.17%

6.92%

80.85%

NFLX

12.53%

130.00%

165.80%

115.40%

EBAY

-3.36%

2.75%

27.74%

120.40%

 

At $248.23, Amazon is trading below all its averages.

50-Day   SMA

264.34

100-Day   SMA

263.03

200-Day   SMA

251.73

 

E = Earnings Have Been Weak                              

Earnings have declined over the past two years. However, revenue growth has been steady. This is impressive considering many companies throughout the broader market have seen revenue declines in 2012.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

19.17

24.51

34.20

48.08

61.09

Diluted   EPS ($)

1.49

2.04

2.53

1.37

-0.09

 

When we look at the previous quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings. Both revenue and earnings have declined on a sequential basis.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   billions

13.18

12.83

13.81

21.27

16.07

Diluted   EPS ($)

0.28

0.01

-0.60

0.21

0.18

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

For companies like Amazon, it’s all about the consumer. That’s bad news for Amazon. The best shot Amazon has at maintaining its current growth rate is through innovation, and it’s certainly doing a good job in that area. However, economic headwinds are nearing hurricane force. They include the potential for massive federal spending cuts, higher taxes, a continuously weakening Europe, and a weak U.S. consumer.

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Conclusion

Amazon is a great company with a superb leader, but it’s simply a dangerous investment in this economic environment. The stock has lost momentum in a strong market. What would happen in a weak market? Savvy investors certainly wouldn’t choose to hold onto expensive technology stocks over their safer investments.

With capital preservation in mind, Amazon is a STAY AWAY.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.