Amazon.com, Inc. (AMZN) Continues To Not Make Sense

Amazon.com, Inc. (NASDAQ:AMZN) released its third quarter results after the market close on October 25th and the results should have been disappointing. Revenue was up 27%, but missed expectations; the company reported a loss of $274 million, down from earnings of $63 million in the third quarter of 2011. This earnings number also came in below analyst consensus. This was the third consecutive q/q decline in earnings per share, and also brought Amazon into the red for the year. The fourth quarter’s Christmas shopping season beckons, and Amazon may end up finding the true meaning of Black Friday (which was so named because that was the day that retailers would become profitable for the year), but we bet that none of those retailers clawing to achieve positive profits were valued at over $100 billion. Amazingly, Amazon is currently above its open from Thursday (though it is down 6% in the last month as the market sold off pre-earnings).

Before replacing the profit in Q3 2011 with a loss, Amazon.com, Inc. trades at a trailing P/E of 282- hardly meaningful, and the current trailing earnings number looks even worse now. The current analyst consensus is for $2.50 in earnings per share in 2013, which represents a forward P/E of nearly 100. True, Amazon has spent much of the last couple years on platforms for future business; the Kindle Fire as a vehicle for selling Amazon products, a network of distribution centers to support same-day delivery in many major U.S. cities. However, we’d expect to see those efforts paying off by now, and we are very wary of being so optimistic. Amazon is seeing considerable competition in the tablet wars, and Wal-Mart Stores, Inc. (NYSE:WMT) is prepping a pilot same-day delivery program.

COATUE MANAGEMENT

Tiger Cubs John Griffin and Philippe Laffont both managed funds which owned shares of Amazon.com, Inc. at the end of the second quarter. Griffin’s Blue Ridge Capital owned 1.7 million shares, making it the second largest position by market value in the fund’s 13F portfolio, while Laffont’s tech and services focused Coatue Management had about 790,000 shares. Find more stocks owned by Blue Ridge Capital and by Coatue Management. Billionaire Steven Cohen’s SAC Capital Advisors more than triples its own stake in Amazon during the second quarter and owned over 1 million shares at the end of June (research more stocks that SAC was buying).

We would compare Amazon to a set of peers including Barnes & Noble, Inc. (NYSE:BKS), manufacturer of the Kindle sort-of competitor Nook; Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG), which also offer tablets; and Wal-Mart. Barnes & Noble is not expected to be profitable in this fiscal year (which ends in April 2013) or in the fiscal year after that. Its revenue growth was slightly positive in its most recent quarterly report compared to a year earlier, but we still don’t think it’s a good buy and with 32% of the float held short a number of market players apparently agree. Wal-Mart, meanwhile, delivered revenue and earnings growth in the 5-6% range in its second quarter (which ended in July) over the same period in 2011. It is generating good profits, so much so that even at a market cap of about $250 billion it trades at only 16 times trailing earnings and 14 times forward earnings estimates. It’s also somewhat safer from a bear market than Amazon, with a beta of 0.4 to Amazon’s 0.8. We think it’s a better buy and possibly a pair trading opportunity for an investor patient enough to weather the consistent market love for Amazon.

Apple and Google also provided disappointing quarterly reports recently. Apple currently trades at only 10 times forward earnings estimates and at a five-year PEG ratio of 0.5; while Wall Street analysts may be a little too optimistic about the stock, we think that it should be able to deliver at least moderate growth over the next several years and so is still a good value. Google had its earnings fall 20% in the third quarter versus a year ago despite rising revenue, but at 21 times trailing earnings we’d consider it a much better buy than Amazon. Analysts expect a rebound next year and so the forward P/E is 15; if the large technology company holds to that, we think that its growth prospects will make it a good value.

We like Amazon as a company, but the stock price is still too high. With earnings numbers trending downward and negative, we would expect a correction and would advise investors to consider investing in some of its peers instead.

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