Why? Well, not to belabor the obvious, but currently, Amazon.com, Inc. (NASDAQ:AMZN)’s not earning a profit. Its trailing-12-month earnings are actually negative. Forward earnings look better, but are still only good enough to give the stock a 75 forward P/E ratio. That’s pricey even for 40% growth. If Amazon can only muster up earnings growth of 31% — nearly a quarter less than investors are counting on — then look out below.
With little more than slowing growth, a hyperinflated market cap, and anemic free cash flow (less than $400 million on a $122 billion market cap) to recommend it, I wouldn’t touch Amazon.com shares with the proverbial 10-foot pole. (Which incidentally, you can buy on Amazon.com for $29.17, with free shipping on Amazon Prime).
Buy the tiebreaker?
So there you have it, folks. One tech stock to buy, and one to sell. But before closing out today’s column, I want to mention one final tech rating — this time a recommendation of SanDisk Corporation (NASDAQ:SNDK), coming out of Macquarie.
Macquarie initiated coverage of solid-state drive memory maker SanDisk today with an outperform rating and a $65 price target. Even though I own the stock, at first glance, I admit I was inclined to dismiss this recommendation out of hand, based on SanDisk Corporation (NASDAQ:SNDK)’s anemic trailing free cash flow number — just $42 million, or barely 10% of the more than $417 million in GAAP “earnings” SanDisk reported last year. Fact is, though… Macquarie might be onto something here.
Free cash flow, which fell off a cliff in H1 of last year, has come back with a vengeance in H2, with SanDisk first moderating cash-burn in Q3, then gushing cash in Q4, as free cash flow topped $210 million. If the company can keep up that Q4 performance in 2013, it will generate more than $800 million in real cash profit, sport a 16 times price-to-free-cash-flow ratio, and become a clear buy based on its projected 24% long-term growth rate.
That is, however, a big “if.” Building a buy thesis on one quarter’s performance, no matter how strong, seems to me a risky proposition. One thing I can say for certain: I, for one, will not be buying any more SanDisk Corporation (NASDAQ:SNDK) shares before seeing next month’s Q1 numbers. While I’d love to trust that Macquarie’s right, and that SanDisk’s Q4 performance will turn into a year-long trend, the prudent course is to verify that this is more than just a single quarter’s anomaly.
The article This Just In: Upgrades and Downgrades originally appeared on Fool.com and is written by Rich Smith.
Fool contributor Rich Smith owns shares of Apple and SanDisk. The Motley Fool recommends Amazon.com, Apple, and Goldman Sachs. The Motley Fool owns shares of Amazon.com and Apple.
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