Holiday shoppers, lured by bargain prices, flocked to their computer terminals and broke all previous Cyber Monday sales records. But investors thinking about buying shares of Amazon.com (symbol AMZN) might want to keep shopping. The e-commerce giant may give its customers great deals, but its stock is no bargain.
In fact, Amazon’s stock is in territory reminiscent of the great Internet bubble of the late 1990s. At the November 30 close of $192.29, the shares traded at 94 times projected 2012 earnings of $2.04 per share. That’s a steep premium to the stocks of other online consumer companies, such as eBay, Expedia and Priceline, which sell for an average of 13 times earnings, says analyst Kerry Rice, of Needham & Company.
To be sure, Amazon is something of a special case. It is the undeniable leader in e-commerce, on pace to ring up nearly $49 billion in revenues in 2011 and expected to generate blistering earnings growth of 70% in 2012. That makes competitors such as eBay (EBAY) and Priceline (PCLN) -- expected to clock in with revenues of $11.6 billion and $4.3 billion, respectively, in 2011 -- look like pikers.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Amazon is also taking on tech giant Apple (AAPL) with the launch of its new Kindle Fire. Amazon’s original Kindle, one of the first e-readers, established the market for electronic books, which now outsell the old-fashioned paper variety. But the first Kindle also had limited utility -- it allowed you to read, in black and white, just like you would with a book. No Web access. No apps.
But by offering a color screen, Internet-search capabilities and the ability to download a variety of apps, the Kindle Fire is now a worthy competitor for Apple’s iPad. And at $199, the Fire is less than half the price. That’s a detail not lost on price-sensitive shoppers, who so far this holiday season have snapped up four times as many Kindles as they did a year ago. In fact, Amazon brags that the Kindle Fire has been the best-selling item on Amazon.com -- in any category -- since its launch on September 28. Analyst Mark Mahaney of Citigroup estimates that an impressive 12 million Fires will be sold in 2012, generating $3.2billion in revenue and accounting for 15% of the tablet market.
Yet those brisk sales have a dark side: Analysts suspect that every Kindle Fire is being sold at a loss. The question is, how much of a loss? Like any loss-leader, the wisdom of the pricing will hinge on whether sales of ancillary products, such as digital books and music, will allow Amazon to recover the loss in a reasonable time and lead to a more robust digital business in the long run.
That’s still an open question. For all of Amazon’s prowess at producing sales, its profit margins are razor thin. In fact, Amazon earned less in 2010 than eBay and managed to earn only twice the profits of Priceline -- even though Amazon is ten times Priceline’s size.
Low profits today are part of Amazon’s business strategy. CEO Jeff Bezos has told analysts that he plans to pour the company’s cash flow into building infrastructure -- including adding 17 new fulfillment centers -- until revenue growth starts to ebb.
As a result, says analyst Herman Leung, of Susquehanna Financial Group, you can’t evaluate Amazon’s stock the same way you analyze other retailers or e-commerce companies. Leung says he values Amazon based on his projections of future free cash flow (the amount of cash profits left after the capital expenditures needed to maintain a business). On that basis, he expects the stock to sell for $260 in a year, 35% above the current price. “The company may look expensive on a price-earnings basis, but on that basis it’s looked expensive for the past three years,” he says. And yet over that time, Amazon shares have more than quadrupled.
Of course, that’s the same sort of logic that analysts used in 1999, when Amazon shares were also selling at a sky-high P/E. When the technology bubble burst in 2000, Amazon shares hit the skids. By the time the stock bottomed, it had tumbled 94%. Bubbles are a lot easier to spot in retrospect, but some analysts are beginning to question whether Amazon really deserves such a premium price. “Investors have been able to make a return on the stock, but it’s not been driven by profitability,” says Rice, who has a “hold” rating on Amazon. “We’re at a point where we can say we understand the potential. Now are we going to see the profits?”
-
Dow Adds 646 Points, Hits New Highs: Stock Market TodayIt was "boom" for the Dow but "bust" for the Nasdaq following a December Fed meeting that was less hawkish than expected.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
Stocks Bounce Back With Tech-Led Gains: Stock Market TodayEarnings and guidance from tech stocks and an old-school industrial lifted all three main U.S. equity indexes back into positive territory.
-
Dow Slides 427 Points to Open December: Stock Market TodayThe final month of 2025 begins on a negative note after stocks ended November with a startling rally.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
Why I Trust These Trillion-Dollar StocksThe top-heavy nature of the S&P 500 should make any investor nervous, but there's still plenty to like in these trillion-dollar stocks.
-
Dow Adds 314 Points to Thanksgiving Rally: Stock Market TodayInvestors, traders and speculators enjoy the best Thanksgiving Week gains for the major stock market indexes in more than a decade.
-
Dow Trims Its Loss to 498 Points: Stock Market TodayMarkets are wondering more and more about returns on the enormous amounts of capital hyperscalers are investing in AI.
-
Dow Dives 797 Points as Government Opens: Stock Market TodayThe process of pricing and re-pricing realities old and new never stops, and next week promises to be at least as exciting as this week.
