The second issue is, media sales that are supposed to drive growth, are actually doing the opposite. Media sales have actually slowed sequentially from 19% last year to 10% this year. Media represented 36% of sales last year, today that percentage stands at 31.47%. Consider that Apple Inc. (NASDAQ:AAPL) has consistently seen double-digit growth from iTunes, this tells me something is wrong.
A third problem is, Amazon’s Web Services won’t be a future growth engine for a long time. This division represents just 4.96% of revenue. Web Services will have to post significant growth for years just to catch up to Media sales, much less general merchandise sales.
A fourth problem is, Amazon’s fulfillment, technology, and content costs are rising faster than revenue. While many investors believe fulfillment costs will recede as Amazon gets bigger, their technology and content costs will not. The Amazon Prime service has 38,000 movies and television shows, and they cost real money. In fact, while fulfillment costs were up 38.69%, technology and content costs rose by 46.35%. Considering the company’s overall sales grew by 22%, this is not a good sign.
A final reason to worry about the company is, Amazon’s operating margin is an abysmal 1.13%. By comparison, Wal-Mart Stores, Inc. (NYSE:WMT)’s operating margin is 6.72%, and eBay’s cost-light business provides a margin of 21.34%. Though Amazon may compete with Apple Inc. (NASDAQ:AAPL) in the tablet business, Apple sells its tablets at a profit, and carries a 28.80% operating margin as a result. Amazon’s idea to sell Kindles at break even or a slight profit, and make it up with sales down the road, doesn’t seem to be playing out.
I know some will say I’m flat wrong
For the Amazon bulls out there, think about this, the company is suggesting next quarter they could have lower sales growth than they have ever reported. Amazon is calling for a decent-sized operating loss, whereas last year they reported an over $100 million profit. Their competitors’ stocks would get crushed if they issued such weak guidance.
On a P/E basis, Amazon sells for a ratio 900% higher than eBay Inc (NASDAQ:EBAY), 1,283% higher than Wal-Mart Stores, Inc. (NYSE:WMT), and 1,685% higher than Apple Inc. (NASDAQ:AAPL). Keep those numbers in mind, when I say that Amazon’s projected growth rate is just 146.52% higher than eBay Inc (NASDAQ:EBAY), 298.61% higher than Wal-Mart Stores, Inc. (NYSE:WMT), and 77.92% higher than Apple Inc. (NASDAQ:AAPL). Are investors really looking at these numbers?
The bottom line is, Amazon’s largest division is slowing down, their media ambitions don’t seem to be playing out, and their web services are a footnote. Analysts that were calling for over 40% EPS growth two quarters ago have cut their estimates to just over 37%. At almost 200 times projected full year earnings, the stock is simply overvalued.
The article 5 Reasons This Stock Looks Overvalued originally appeared on Fool.com is written by Chad Henage.
Chad Henage owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, and eBay. The Motley Fool owns shares of Amazon.com, Apple, and eBay. Chad 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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