The moment I look at Amazon.com, Inc. (NASDAQ:AMZN)’s logo, I am dumbstruck by the way it has stayed true to its vision of providing A-to-Z products. A leader in the e-retailing industry, Amazon has always delivered for its customers and sellers.
For the first quarter of 2013, Amazon.com, Inc. (NASDAQ:AMZN) reported robust sales growth of 22%, but net income declined by 38% on a year-over-year basis. One of the concerns sighted by analysts was a huge decrease of 85% in the trailing-12 months free cash flow as compared to the year-ago period. It goes without saying that free cash flow is a highly important metric while analyzing the financial health of a company and similarly, in the case of Amazon.com, Inc. (NASDAQ:AMZN), it indicates increasing expenditures (operating and capital) without proportionate growth in revenue.
Numbers that matter
However, what really matters at this point (halfway through the second quarter) is the financial guidance for Q2 that was given by the company along with Q1 results. One of the estimates that catches my attention is operating income for the quarter, which is expected to be between a loss of $340 million and a profit of $10 million. However, this is not quite surprising because the company has been following a pessimistic outlook since early 2012 while giving guidance.
Contrary to norms of the game, Amazon.com, Inc. (NASDAQ:AMZN)’s share price has been trading in the range of $260 to $270 even after the financial guidance indicated a dull quarter. Again, this is a not strange because such a pattern has existed in the company’s stock price since good times.
Making sense of confusing numbers
Now for the most important question: what to make of these numbers? Honestly speaking, Amazon’s results have always baffled me; especially the relationship between its results and stock price. Thus, for my own convenience I have narrowed down the entire analysis to three vital areas of discussion, which are future initiatives, competitors and stock valuation. This will enable us to better predict the stock’s future direction.
A glimpse of the future
Speaking of future initiatives, one of the highly innovative things happening at Amazon includes its attempt to eliminate traditional TV with Amazon Studios. In an astute move to increase customer engagement, pilots have been released out in the open for customers who want to decide what goes into full-season production. I am not sure how is this going to play out, but nonetheless, Amazon has convincingly tried to disrupt established norms in the TV business.
Industry rivals
Any person would take a split second if asked about Amazon’s biggest competitor. The first thing that strikes me when I compare Amazon’s and eBay Inc (NASDAQ:EBAY)’s stock is the price-earnings multiple. It is scary to see Amazon trading at a multiple of more than 1,000 (taking the first-quarter’s EPS). Even though Amazon has ventured into different businesses in the recent past, it is difficult to justify such valuation when its core competency remains similar to eBay Inc (NASDAQ:EBAY)’s.
In a major move to lure sellers away from Amazon, eBay is overhauling seller fees and working toward making the pricing system simpler. This is a biggie because eBay has not made changes to its pricing system since 2010 giving more transparency to the online merchants. If this strategy plays out well, it will promote higher seller loyalty and a stronger selling network.
Amazon also finds good competition in brick-and-mortar retailers like Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). Both of these giant retailers are enhancing their e-commerce operations in order to cater to the mobile lifestyle of customers.
As per Q1 numbers, Wal-Mart Stores, Inc. (NYSE:WMT) increased its online sales by 30%, which was higher than anticipated. The company also laid down plans for expanding its e-commerce operations in key markets that include the U.S, the United Kingdom, Brazil and China. Strategic investments are expected in Japan, Mexico and Canada, as well.
Recently, Wal-Mart bought a couple of technology companies and merged them with its technology lab in order to strengthen its online presence. Target Corporation (NYSE:TGT)’s recent announcement that it found technology companies to help the company grow its e-commerce business shows a ton of effort being made in grabbing a reasonable market share in the e-retailing industry.
It is reportedly working on same-day delivery service quite similar to a service launched by Amazon sometime back. Target’s recently launched ‘Cartwheel’ website with Facebook Inc (NASDAQ:FB) saw more-than-expected participation from customers who claimed various discounts to be redeemed at its stores.
Target’s first technology and innovation office, which will focus exclusively on e-commerce expansion, is a major step in achieving robust online sales/customer conversions.
Even Google Inc (NASDAQ:GOOG) is featured on the list of Amazon’s competitors, especially with the launch of Google Inc (NASDAQ:GOOG) Compute Engine cloud service that offers direct competition to Amazon’s Web Services (AWS). Under AWS, a customer can rent the hardware to run virtual servers as well as the software to manage the hardware. In order to compel customers to switch from AWS, Google is keenly focusing on the pricing of this service. For instance, Google has offered a per-minute pricing model as compared to Amazon’s per-hour pricing.
The bottom line
Well, I have already introduced you to the perplexing valuation of Amazon’s stock. Its share price movements fail to exhibit a sort of predictable relationship with the financial results. Hence, it is difficult to predict the stock’s movement with reasonable accuracy as it does not follow a well-defined pattern.
Most analysts feel that the stock is overvalued when compared to peers, which is definitely the case, and as such it is viable to sell the stock to avoid a steep decline in price.
However, I disagree with going short on the stock as I believe that even though it’s overvalued, Amazon’s stock has the potential to stabilize based on a study of its history and an analysis of future events. In my opinion, therefore, it makes sense to have this stock in your portfolio.
The article This Company Has It All: From A to Z originally appeared on Fool.com and is written by Mihir Mehta.
Mihir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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