Wall Street is apparantly thrilled with the third quarter earnings report from online retailing giant Amazon.com (AMZN), as judged by the stock’s $4 (12%) jump in today’s session. While I am not long the name, if I was, I’d be trimming it. Amazon is a retailer, plain and simple. Therefore, the current P/E multiple the stock garners is quite ridiculous. Back in 1999, the bullish argument for the company centered around the idea that without physical stores, Amazon could earn much higher margins than a Borders, or a Best Buy, or a Wal-Mart.
That thesis, however, has proved to be incorrect. Amazon’s margins are not any better than your traditional big box retailers. In fact, Amazon’s operating margins trail those of Target, Wal-Mart, and Best Buy. Turns out that warehouses carry the same costs as actual storefronts. With most retailers trading at less than 1.0 times revenue, Amazon trades at closer to 1.5 times.
The company’s growth rate does exceed its competitors, for now anyway. Since Amazon has only been around for about a decade, they can roll out new products for a while before becoming mature enough to truly become a one-stop shop for everything. That said, I don’t see how the company deserves a P/E multiple of more than 25 or 30 times earnings, as their growth should slow to below 20 percent going forward.
Right now shares of Amazon trade at about 80 times this year’s expected earnings. Even if the company can grow the bottom line by 67 percent, as investors are expecting (that sounds optimistic to me), we’re still looking at a 2007 P/E of more than 50 times. I just don’t know how anyone can justify such a lofty price for the stock. If you think I’m wrong, please share your views.
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Dead right Chad,
hard to make money on stocks priced into the stratosphere …
Keep up the good works …
JW
The Confused Capitalist
Not only do I agree with you. I also feel they are (as a web product too) not really standing out as much as they used to before: my two cents about the topic.