Amazon.com, Inc. (NASDAQ:AMZN), the well-known online retailer, has befuddled value investors for a while. These investors have been waiting for its shares to decline from what is believed to be an extremely enthusiastic price level, but this stock, which recently reached an all-time high, just refuses to comply.
Though the stock seems to have Teflon-like backing, there may be a way to short Amazon successfully. Anticipating the right inflection point, or the time when its support begins to turn, could greatly increase one’s chances. That inflection point will likely be when the positive factors buttressing the stock are no longer compelling enough to offset its negative attributes. But what are these factors currently supporting the stock?
Amazon’s bullish argument
There are legitimate reasons Amazon.com, Inc. (NASDAQ:AMZN) should sell for a premium price. The company might be the best operator in the retail space. It offers incredibly convenient access, maybe the widest-range of in-stock product, and extremely competitive pricing. To prove its retail powerhouse status, Amazon has shown an incredible record of revenue growth. The company has more than tripled its sales from 2008 to 2012, and posted an amazing 78% revenue jump over the last two years.
Another supporting factor is the expectation that Amazon will significantly increase its profitability. Though revenue has grown steadily, reported profits have been haphazard. The company posted net income of $645 million in 2008, peaking at $1.15 billion in 2010, and then dropping to a slight loss of $39 million in 2012. This inconsistency, though unsettling, has not dampened investor enthusiasm. Sustaining the stock is Wall Street’s assumption that the company will eventually deliver consistent profits. There is some historical evidence supporting that belief, with Amazon.com, Inc. (NASDAQ:AMZN) generating profit margins between 3.3% and 3.6% from 2007 through 2009.
It seems that the combination of impressive revenue growth and the expectation of meaningful profit are the key factors backing Amazon’s share price.
Amazon’s bearish argument
On the other hand, the short thesis seems to rest on the company’s lofty valuation, or adjusted cash earnings multiplied by a market capitalization factor. Based on its 2012 financials showing $61.1 billion in revenue and adjusted cash earnings of $1.56 billion, Amazon sells at a roughly 79x multiple. Using enterprise value, or stock market value plus debt, relative to revenue as a secondary valuation technique, the company is valued at around 2 times sales. These valuations can be compared to its major retailing peers: Costco Wholesale Corporation (NASDAQ:COST) and Wal-Mart Stores, Inc. (NYSE:WMT).
Costco operates membership warehouses, offering very low prices on a limited selection of nationally branded and select private-label products, in a wide range of merchandise categories. The company excels at producing high sales volumes and rapid inventory turnover, and has shown revenue growth of around 27% from 2010 through 2012 with profit increasing 33%.