The company itself has confirmed that it makes no profit on Kindle sales. Moreover, Apple Inc. (NASDAQ:AAPL) has answered the Kindle with its own iPad Mini, which will cannibalize the Kindle’s sales going forward, further accelerating Amazon’s year-over-year operating margin decline deep into the red. Moreover, Wal-Mart no longer sells Amazon’s Kindle eReaders and tablets, confirming that consumers are more interested in Apple’s iPad and other gadgets. If more retailers decide to stop selling Kindles, Amazon will surely lose a valuable mean of physically displaying its products, something that can’t be achieved through the website.
Moreover, Kindle is not really built for productive tasks — it’s a great device for reading books but it can’t replace the functionality of a smartphone. Though Kindles allow consumers to consume media, you can’t create anything from it! Even Kindle Fire, which runs a different version of the Android operating system, hasn’t impressed me much — albeit with the exception of an impressive resolution. Moreover, the iPad Mini also wins when it comes to apps. Not only does it offer more apps, but more useful and high-quality ones. Many of the current Kindle’s best apps are ported from iOS — so, I don’t expect to see many rich-quality exclusive Kindles apps.
Foolish Bottom-line
Based on the facts presented in this article, it’s unambiguous now that Amazon has entered a phase of declining growth. On the other hand, Amazon’s stock continues to trade at P/E ratios of absurdly high levels, where it far exceeds even the best earnings growth forecasts. The company faces severe competition in its core market and is therefore desperately looking for new sources of growth outside of its core e-business strengths.
Even after reporting disappointing year-over-year growth in the last few quarters, Amazon shares are still up more than 35 percent, whereas Apple recently reported an excellent quarter, yet is down more than 10%. Apple’s shares currently trade at 10 times trailing earnings and 6.8 times trailing EBITDA — the lowest since the financial crisis of 2008 — whereas Amazon trades at over 180 times its forward earnings.
Consequently, I believe Amazon is overvalued by many metrics, and after the premium provided by the recent rise in the shares it’s certainly approaching the optimal risk/reward zone. Remember, being a short candidate doesn’t mean I am recommending you short Amazon today. I would wait for the shares to rise to the mid-to-high $285-$300 level, as the shares present an attractive risk/reward there. Over-$285 is where I will start a short position.
The article The Amazon Bubble Could Burst Soon originally appeared on Fool.com and is written by Nauman Aly.
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