The Amazon.com, Inc. (AMZN) Bubble Could Burst Soon

Page 1 of 2

Amazon.com, Inc. (NASDAQ:AMZN) ​ currently trades at a whopping 3500 times trailing earnings. Analyst expectations are for $1.47 in EPS for the current fiscal year, and the current stock price is still 181 times that figure, compared to its peer average of 22. Amazon has a free cash flow margin of less than 1 percent, and the enterprise value implied by the current stock price is 45 times trailing EBITDA, much higher than the rest of the industry.Amazon.com, Inc. (NASDAQ:AMZN)Analysts expect revenue growth of 23%-25% this year, and if the company can still somehow manage to grow its free cash flow at a steep 25% rate for the long term — discounting that back, fair value on Amazon still comes out around $155 — it will be one of, if not the, most expensive large cap company today.

Even with a two-point concession in the discount rate to other established companies in the services industry, Amazon looks meaningfully overvalued today. I believe Amazon’s earnings are simply not growing fast enough to justify its lofty valuation.

The numbers above certainly don’t justify buying Amazon.com, Inc. (NASDAQ:AMZN). The company has incessantly posted year-over-year declines in the quarterly earnings. Amazon currently has an operating margin of less than 4%; whereas with more than 7-times Amazon’s revenue, Wal-Mart Stores, Inc. (NYSE:WMT)’s operating margin of 8% is double than that. By operating on such a thin margin, future costs of upgrading its infrastructure, expanding into new areas and increased competition could erode billions more from its operating profit.

With the ability to offer shoppers the chance to see and touch a product before purchasing it, retailers like Wal-Mart always had/have an advantage over the websites in the e-commerce sales industry. Amazon and other e-retailers did try to offset that by offering same-day delivery for some products. But Wal-Mart fought back with its own same-day delivery service by using its wide network of superstores as distribution centers.

Moreover, in the effort to offer the lowest prices, Amazon ends up making less profit on each of the products it sells. Consequently, this translates into a non-linear and lower gross margin for Amazon than Wal-Mart.



AMZN Gross Profit Margin Quarterly data by YCharts

But what surprises me the most is how Amazon’s share price have continued to rise and reach new highs, even when the company’s core business model, which accounts for more than 95% of Amazon’s total revenue, has nothing but contracted. With core e-business guidance of about 17% revenue growth for the first-quarter of fiscal year 2013, which will be the sixth successive quarter of reduced year-on-year growth, Amazon can no longer be considered a growth company.


AMZN Operating Margin TTM data by YCharts

Moreover, the biggest competitive advantage that Amazon enjoyed for years is coming to an end — its ability to sell products without charging state sales tax to shoppers. Texas and California have already passed legislation that will ensure Amazon starts collecting the sales tax before long. That, along with the ever increasing costs of maintaining massive warehouses loaded with inventory, would surely put further dents in Amazon’s earnings in the future. As the chart above shows, the stock is certainly, albeit perhaps slowly, working its way to becoming a bubble.

Amazon also ensures that its products reach customers in the shortest amount of time possible. This is one of the reasons it has enjoyed excellent customer satisfaction over the years. But I believe, as postage and shipping rates increase, the company will come under further pressure from this rising operating cost. Moreover, Amazon’s foray into hardware has been nothing but a part-time hobby.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!