I know that some investors are going to disagree with whatever I say about Amazon.com, Inc. (NASDAQ:AMZN). The company’s stock performance has been nothing short of amazing. However, no company operates in a bubble forever, and as amazing as Amazon is, there are big problems that just can’t be pushed aside.
We do know this is a retailer right?
I understand that it’s easy to get excited about Amazon.com, Inc. (NASDAQ:AMZN). The company offers good deals on pretty much everything that anyone could want. If you have Amazon Prime, you get the goods fast with no shipping cost, and you get the Kindle lending library, 38,000 free streaming videos and more.
All that being said, Amazon at its heart is still just a retailer. When it comes to selling goods, they compete against the granddaddy of retail in Wal-Mart Stores, Inc. (NYSE:WMT). Walmart currently has more revenue in one quarter than Amazon.com, Inc. (NASDAQ:AMZN) has in almost a whole year. In addition, Wal-Mart Stores, Inc. (NYSE:WMT) has over 4,000 locations domestically, which is more than the number of warehouses that Amazon will probably ever build.
However, Amazon.com, Inc. (NASDAQ:AMZN) isn’t satisfied with just buying wholesale, selling retail, and making money. Instead the company competes with eBay Inc (NASDAQ:EBAY) in trying to get smaller retailers to sell on their site. Since over 60% of eBay’s sales are fixed prices, eBay Inc (NASDAQ:EBAY) and Amazon have never been more direct competitors. The difference is, while Amazon hosts small sellers, eBay Inc (NASDAQ:EBAY) not only does this, but they also have a hugely profitable PayPal unit as well.
As if this wasn’t enough competition, Amazon.com, Inc. (NASDAQ:AMZN) decided to take on Apple Inc. (NASDAQ:AAPL) in the device and content business. The company’s Kindle Fire lineup, and digital sales, compete with Apple Inc. (NASDAQ:AAPL) at every turn. Amazon would say,” instead of buying the $499 iPad, why not buy our $269, Kindle Fire HD 8.9″? Instead of buying the iPad Mini for $329, why not buy our Kindle Fire HD for $199? Amazon is taking this to a new level by offering the Amazon Cloud Player for iOS, and making the Amazon MP3 store available specifically for the Safari browser.
Biting off more than even Jeff Bezos can chew
When you go after the best and brightest companies in their respective industries, you better do everything right. Amazon has seen tremendous growth, but with a stock selling for a forward P/E of almost 200, there can be no form of weakness.
The first issue facing Amazon.com, Inc. (NASDAQ:AMZN) is, their business model isn’t working the way most people think. General merchandise sales have moved from 60% of total sales to almost 64% of total sales in the last year. In the meantime, these sales have decelerated from 40% growth, to about 30% this year. The slowdown in Amazon’s most important business should give investors pause.
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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