“Amazon.com up 24% right now. These are all time highs. Not just intraday highs, closing highs, etc. These are highs for Amazon since 1999. So this is not a 52-week high which is what we’ve been talking about a lot lately. This is an all time high and gives a boost to the retailers as you can see, as they’ve lost their steam.” — Fox Business Network 10/23/2009
As any market observer has probably noticed, Amazon.com (AMZN) reported a blowout quarter in which 62% increase in net income on revenue of $5.45 billion. On a per share basis, Amazon posted earnings of $.45 in the third quarter which was significantly better than analysts expected. Amazon said that the number of active customers on their platform increased 17% from a year ago to 98 million, as shoppers looked to grab great valued on the e-commerce site. They raised revenue expectations for the full year above the level analysts had expected to see.
For Amazon, the results were strong pretty much across the board. Books and CD’s sold well rising 17%, with electronics and general merchandise up 44%. They declined to break out sales of the Kindle e-book reader, but they did say it is their best selling product. Furthermore, they announced that e-books formatted for the Kindle will be made readable on computers or other non-Kindle devices. This is going to continue to expand the scope of their e-book sales audience. If they can become the dominant distributor of e-books they would benefit from an iTunes-like (AAPL) presence for this burgeoning industry.
Not surprisingly, analysts have used the outstanding results as an opportunity to upgrade the stock. All of this positive momentum has sent the stock soaring more than 20% to an all-time high price, which is especially impressive as the rest of the market has fallen off about 1%. This is the sort of publicity and financial performance that Amazon could only hope for in the months leading into the holiday shopping season.
At Ockham, we are reaffirming our Fairly Valued valuation at current price levels. As a value investing shop, we cannot in good conscience advise buying a stock after a 20%-plus run-up, but the fundamentals of Amazon continue to impress. If you were not already in Amazon before this run, you may have missed your opportunity. We are looking for a growth rate of nearly 20% going forward through fiscal 2010, which does begin to justify the steep multiple. Now trading at about 70x this years’ expected earnings, and 53x next years’ makes this just too rich a valuation to dive in now. That being said, the stock is only Fairly Valued so if you already own it, we would not necessarily recommend selling into this strength.
