Is Amazon Overvalued?

With shares of Amazon.com (NASDAQ:AMZN) trading at around $258.95, 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

As we all know, Amazon is the number one e-retailer in the world. That’s great, but there’s only one problem with being number one, which is that everyone else is going to come after you. In this case, it wouldn’t be “everyone” but “every other company” in the industry. Those companies are going to steal ideas and find ways to undercut the operation.

Amazon is still the clear leader in the space, but are there current signs that this domination could be at risk? If you were to ask analysts, they would say, “No!” Analysts adore Amazon. Of 38 analysts covering the stock, 28 have a Buy rating, nine have a Hold rating, and only one has a Sell rating. Whether investors want to believe it or not, when a bunch of analysts pile onto a stock, that stock usually ascends. It’s all part of the virtuous cycle. The problem is that once things head south for a growth stock such as Amazon, all these analysts run away, and the vicious cycle begins. It’s very difficult to predict where a stock like Amazon is likely to go. Excitement and potential have clearly taken the lead over reality. Is it possible that Amazon will grow into its numbers? Yes. But this is far from one of the safer plays that we like. Let’s take a look at some numbers and see if they can provide a hint for Amazon’s future.

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When it comes to online companies, one of the best ways to look for hints related to current or recent performance is to visit Alexa.com. This is a site that measures traffic for every site on the Internet. While the amount of traffic to a site doesn’t guarantee that sales are up or down, it can provide a clue. Looking at the big picture, Amazon has done quite well. For example, in 2011, Amazon was ranked #16 throughout the world. In other words, it was the sixteenth-most visited website in the world. Today, it’s ranked #9. Therefore, it’s the ninth-most visited website in the world. It’s also currently ranked #5 in the United States. The Reach statistic measures what percentage of Internet users visit a website. In 2011, 4.25 percent of Internet users visited Amazon. That number is now approximately 8.98 percent. That’s quite an improvement. While the last two years have shown tremendous growth in regards to website performance, what about the past three months?

There has been a lot of negative press for Amazon over the past three months, but has it meant anything? As it turns out, traffic on Amazon has been poor over the past three months – relatively speaking. Over the past three months, pageviews have declined 14.46 percent, pageviews-per-user have declined 20.17 percent, time-on-site has declined 19 percent, and the bounce rate has increased 18 percent. Bounce rate refers to the percentage of people who visit one page and leave. All the numbers for the past three months are worrisome. However, once again, they only act as a small clue.

There are other headwinds that Amazon is currently dealing with, which include:

  • Heavy spending on warehouse expansion and R&D
  • Profit declines
  • Increased competition in the tablet space
  • Increased competition for cloud services
  • Rising fees for third-party sellers (could open door for other companies)
  • Forward P/E of 71.94
  • Weak margins

All that said, the third-party platform is still growing 40 percent year-over-year, and with e-retailing growing by the day, Amazon is still in a good position.

As you can see, there’s a lot going on with this story. Let’s simplify matters by looking at some basic fundamentals for Amazon as well as its peers.

The chart below compares basic fundamentals for Amazon, Best Buy Co. (NYSE:BBY), and Wal-Mart Stores Inc. (NYSE:WMT). These three companies differ in size. Amazon has a market cap of $117.06 billion, Best Buy has a market cap of $8.70 billion, and Wal-Mart has a market cap of $254.64 billion.

AMZN

BBY

WMT

Trailing   P/E

N/A

N/A

15.40

Forward   P/E

71.94

10.92

13.15

Profit   Margin

-0.06%

-0.98%

3.62%

ROE

-0.49%

-11.54%

22.42%

Operating   Cash Flow

 $4.18 Billion

 $1.59 Billion

 $25.59 Billion

Dividend   Yield

N/A

2.70%

2.50%

Short   Position

N/A

14.00%

2.00%

 

Based on the fundamentals above, Wal-Mart looks like the best long-term option. Let’s take a look at some more important numbers prior to forming an opinion on Amazon…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Amazon is slightly higher than the industry average of 0.30.

Debt-To-Equity

Cash

Long-Term Debt

AMZN

0.54

$11.45 Billion

$4.38 Billion

BBY

0.62

$1.83 Billion

$2.30 Billion

WMT

0.66

$7.81 Billion

$54.23 Billion

 

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T = Technicals Are Strong  

Amazon has outperformed Best Buy and Wal-Mart over the past year, but it didn’t outperform Wal-Mart by much. Furthermore, Amazon doesn’t pay a dividend while Wal-Mart currently yields 2.50 percent.

1 Month

Year-To-Date

1 Year

3 Year

AMZN

-6.27%

2.44%

33.94%

83.49%

BBY

26.55%

115.40%

17.15%

-38.57%

WMT

5.85%

14.02%

31.69%

51.28%

 

At $258.95, Amazon is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

265.12

100-Day   SMA

258.43

200-Day   SMA

248.32

 

E = Earnings Have Been Poor            

It’s rare to see a stock with such poor annual EPS results perform so well. On the other hand, revenue growth has been impressive on an annual basis.

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 last quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

17.43

13.18

12.83

13.81

21.27

Diluted   EPS ($)

0.38

0.28

0.01

-0.60

0.22

 

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 Support the Industry

E-retailers continue to gain market share from brick-and-mortar retailers. This trend is likely to continue.

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Conclusion

Amazon is a consumer discretionary play. Therefore, the good times will be highly rewarding, and the bad times have the potential to bring severe pain. Investors looking for momentum might want to consider Amazon. The stock has been a freight train for a considerable amount of time. However, one must ask: what is the current fuel for that freight train? Other than revenue growth, what’s impressive?

All factors considered, Amazon is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.