Amazon.com (AMZN) is a Wall Street darling and has been for a number of years now. Its 34% gain in 2010 easily beat all of the market averages and the stock is a certified megacap with a market capitalization north of $80 billion. That being said, I think it is a dangerous time to buy the stock and there is a long way down should investors sour on the name. Here are several reasons why I think this stock is heading lower.
1. Valuation- Amazon.com has always been an expensive stock based on fundamental valuation models and today’s quote is no different. It is currently changing hands at 71.7x 2010 estimates and 51.6x 2011 estimates. These valuations are usually reserved for explosive, young growth companies, which Amazon.com is not anymore. Don’t get me wrong, it is still posting solid growth, but not at the level to justify such a huge multiple. Basically it is priced for perfection and no company is perfect.
2. Kindle Competition- I think the Kindle is one of the greatest inventions and has dramatically enhanced my personal reading life, but this will start to work against Amazon soon. The iPad’s ereader is smooth and colorful, which is the Kindle is not. Many new ereaders have hit the market recently and Amazon’s first-mover advantage in the market is going to wear off. I think a lot of the stock’s success over the past 18 months is in large part due to the Kindle, so there is downside from this as well.
3. Earnings/Estimate Revisions- One would think that a company with such a high price/earnings ratio is knocking the cover off the ball when it comes to earnings, but that is not the case with Amazon. It beat estimates by three cents last quarter, but missed analyst views by a hefty 11 cents in the prior quarter. Additionally, full-year 2010 estimates have dropped nine cents to $2.51 per share over the past 90 days. Again, these sorts of numbers are a pretty big red flag when the stock is trading at over 70x earnings.
So where do I think the stock is heading? I don’t think a crash is imminent, but the preceding reasons are enough for me not to put new money into the stock and would seriously prompt me to consider selling if I already had the stock. I think the risk/reward ratio is poor for the bulls right now and there are plenty of better opportunities to make money on the long side. I think Amazon.com will underperform the major averages in 2011.
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