When Will Amazon’s Slide End?

Source: http://www.amazon.com/b?node=8037720011

Amazon (NASDAQ:AMZN) is one of the worst-performing stocks in the S&P 500 this year, with shares down nearly 22 percent. With the stock in bear market territory, how much further will this former high flier fall?

To those who have been following the stock closely, this decline should come as no surprise. The stock has been an outperformer for many years, and it has made fortunes for its long-term shareholders. Analysts were coming out with increasingly more bullish reports and price targets as the company’s dominance in the rapidly growing e-commerce space has grown. Such bullishness is unsustainable, and with the shares topping $400 apiece at the end of last year, the stock ran out of steam.

I think there are a lot of investors out there who missed the upswing in Amazon shares and who are looking for an entry point. Sure, $312 per share certainly looks a lot better than $400 per share, but is this the end of the pain?

I think two things stand in the way of a bottom, and this means that the stock can continue to slide.

First, analysts are still extremely bullish on Amazon shares.  According to MarketWatch, of the 46 analysts that cover the stock, 34 of them have “buy” or “overweight” ratings, and there is just one lonely analyst who rates the stock as “underweight.” Furthermore, the average price target is $433 per share.

This means that analysts are still way too bullish. We can’t start looking for a real bottom to this bear market until we start to see analysts lower their expectations. The end of a bear market is characterized by relentless selling and a loss of hope. Recall that in March 2009, analysts were paraded in front of the world, talking about the next great depression and a continued collapse in stocks. This was the time to buy. The same thing will happen in Amazon shares. Since it is not happening yet, it is not the right time to buy.

Second, Amazon is a very difficult stock to value. This is the case because the company effectively has no earnings. For a stock that is valued at $312 per share, it has seen just $5 in earnings over the past four years. The reason for this is that the company continues to heavily invest its profits in developing its infrastructure of distribution centers. By doing so, it is able to retain its dominant position in the e-commerce market.

But this also means that value investors have a difficult time determining an appropriate price to buy the stock. Bear markets end because selling no longer outpaces buying. This occurs because either there are no more sellers or because buyers start to enter the market. The latter takes place because value investors, who aren’t concerned with short-term price action, determine that an asset has reached a price point at which it will generate a sufficient return to justify the risk of owing it.

If analysts are correct in assuming that Amazon will earn about $2 per share in 2014, then value investors are going to use this as a reference point to determine a good price to buy the shares. But value investors aren’t in the market to pay 150 times a stock’s earnings. They want to pay 10 times or 15 times, or occasionally something a little higher. Even if they are willing to go to 25 times, the stock would still have to fall to $50 per share — a more than 80 percent decline — before they will become interested.

While the company can attempt to appease the market by reducing infrastructure spending in order to generate more earnings, one has to wonder whether this will impact its dominant role in the marketplace.

With that being said, I think Amazon is a compelling investment. But at the same time, analysts are too bullish, and we will have a very difficult time picking an appropriate point at which the stock offers good value. Thus, I think investors should continue to wait for the stock to fall further.

Disclosure: Ben Kramer-Miller has no position in Amazon shares.

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