It's Time To Sell Amazon.com

I may be the only analyst who isn't buying into the stock hype surrounding Amazon.com (Nasdaq: AMZN  ) these days. Our newsletters can't seem to give the stock enough love, our analysts are putting real money behind it, and now Jeff Bezos is getting accolades for CEO of the year. Remember how well that went for Reed Hastings, who was winning best CEO accolades last year? I'm afraid Bezos is the new Hastings and Amazon is the new Netflix (Nasdaq: NFLX  ) . And I don't mean that in a good way.

Amazon has done a great job thrusting itself into our lives in ways extending far beyond books, but like Netflix, it has done so at the expense of growing profits. Eventually the company is going to ask for more from customers and that's when I think the market will begin to realize that Amazon's competitive position is tenuous at best.

Leading the low-margin online retailers
There's no doubt that Amazon is the leader of the online retailing pack, but is that really a group of companies you want to be out in front of? Online retailers have beaten up on the likes of Best Buy (NYSE: BBY  ) and Barnes & Noble because it can operate with lower gross margins than their brick-and-mortar competitors. Undercutting competitors isn't exactly a formula for building wildly successful high tech businesses like Apple (Nasdaq: AAPL  ) and Google, whom Amazon is now trying to compete with.

And it isn't like Amazon doesn't have fierce competition in every space the company plays. Apple currently owns the tablet space where Amazon is trying to make inroads, Netflix is still the dominant streaming company, and there are online retailers galore that will keep margins low in that space. Sales may continue to grow but it isn't like Amazon will ever be in a high-margin business. 

Creating new ways to lose money
The Kindle Fire is the first real threat to Apple's iPad but the device sells for a loss and is really only a gateway for the company to get customers to buy books and apps and expand its Prime streaming businesses.

Just ask Netflix how strong margins are in the streaming business when media companies come wanting their piece of the pie and consumers balk at higher prices. The current $79 a year Amazon charges for Prime comes with very few attractive titles to stream and throws in free two-day shipping just for good measure. That combination can't last long at that price.

So like Netflix before it, the question becomes: How will Amazon make money on streaming or on its tablet devices?

You're paying what for this stock?
My biggest problem with Amazon's stock right now is the absurd price it is trading for.

The tech industry is full of mouth-watering value stocks that I can get excited about. Intel (Nasdaq: INTC  ) has a strong competitive moat, $15.2 billion in cash, and still trades at just a 10.8 P/E ratio. Microsoft has $57.4 billion in cash and a measly 10.3 P/E ratio. Even the mighty Google looks attractive, trading at 21.4 times trailing earnings and sitting on $42.6 billion in cash and equivalents.

Amazon, on the other hand, is priced as if its business is going to perform flawlessly for the next decade. The company's trailing P/E ratio is an eye popping 96 and its forward P/E ratio is only one point better at 95 times earnings. This from a company whose earnings are down year-over-year and has underperformed expectations two of the last four quarters. Usually those multiples are reserved for companies going in the opposite direction Amazon is said to be headed. 

If you've drunk the Kool-Aid on Amazon and think I'm crazy, let me point out that I may have been the only Fool crying foul when Netflix was trading at the same insane multiples. It took a while but my thesis was finally proven right when the market's golden boy, Hastings, made a few mistakes and customers started leaving the company. I'm not claiming I can time the market with Amazon this time but I don't think the company will be on its high horse forever.

Information overload
My last beef with Amazon is their website. It reminds me of going to Yahoo.com in the early 2000s. The site is filled with so much information and so many links I can't wait to get out and move on to something that doesn't make my eyes hurt.

The shopping experience is important on the Internet, just as it is in a mall. Amazon may have millions of customers, but right now the experience looks like a flea market when compared to other online retailers.

Foolish bottom line
I just can't get excited about a company that has falling margins, is selling its newest product at a loss, and trades at extremely high multiples. In time, Amazon may catch up to those multiples, but I think the risk it won't is too high.

Motley Fool's top stock for 2012 isn't Amazon. If you want to find out what it is, a special report reveals all. It's entirely free, but will be available for only a limited time so check it out now.

Fool contributor Travis Hoium manages an account that owns shares of Intel and Apple. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Intel, Google, Amazon.com, Best Buy, Apple, Yahoo, and Microsoft. Motley Fool newsletter services have recommended buying shares of Netflix, Amazon.com, Yahoo, Google, Apple, Microsoft, and Intel. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Intel. Motley Fool newsletter services have recommended writing covered calls in Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2012, at 11:06 PM, TMFNewCow wrote:

    Good points and well thought out arguments. Nice article, Travis.

    -- Evan

    (long AMZN)

  • Report this Comment On January 18, 2012, at 11:23 PM, Oldfool103 wrote:

    Finally, someone who finds the shopping experience at Anazon as dreary as I do. I was looking for a book yesterday, going through all of the vendors, when I actually found one right in my neighborhood (without any shipping charge!). Personally I don't find it much fun and if that is what the Fire is really all about, then I hope all of those millions of new owners enjoy all of that.

    I have sold low margin products in my past, and while I have made a living at it, it was a daily slog. Watching it jump today felt like an invitation to a coming disaster.

  • Report this Comment On January 18, 2012, at 11:26 PM, Popnfresh100 wrote:

    Well done!

    The emperor has no clothes.

  • Report this Comment On January 18, 2012, at 11:55 PM, ByrneShill wrote:

    I more or less disagree with all your points except for one:

    1-Gross margins aren't that high, but they've never been. They're not too bad on ebooks.

    2-Streaming can pay. Itunes pays pretty well. Always has.

    3-Amzn has never released the gross margins on the kindle fire. Most analysts believe it sells for a loss, but my hunch (which is backed by an EE degree and experience designing embedded systems) is that they're breaking even. I don't know who originally came up with the 50$ loss everyone talks about on the kindle fire, but if amzn is really losing 50$ on each device, they're doing something terribly wrong and it's only a matter of time before they correct theit process and lower their cost.

    4-I actually like amzn website. Maybe I'm a bit of an OCD who likes being carpet-bombed with information, but I think it's really fast to find whatever I want. For an example of a bad website, check overstock.com.

    5-All that is meaningless because the P/E is almost 100. To get back to a PE of 20 (keep in mind that aapl is at 15), earnings would have to rise fivefold without seeing the stock move a dollar. This is ridiculous. No large-cap with a PE of 100 has ever been a good investment. Even if the execution is perfect earnings won't rise fivefold.

    In order for that to happen, AMZN would need to corner the whole US book market, kill itunes, takes 80% of the tablet market, and send best buy to bankrupcy. I'll take the other side of that bet.

  • Report this Comment On January 18, 2012, at 11:57 PM, ByrneShill wrote:

    bte I meant that I disagree with all your points but still come to the same conclusion as you.

    Lots of kool-aid has been drunk lately.

  • Report this Comment On January 19, 2012, at 3:25 AM, enchantedbear wrote:

    I completely dissagree. Based on the numbers from the past and present it may not look so hot, but equally as important is it's business model and Amazon will only find greater success. Don't let the metrics fool you, stocks are more than just metrics

    With my droid barcode app I can scan a product in a brick and mortar store and find it at Amazon in 30 seconds and get it at a fraction of the price with no sales tax, free shipping and a lower price and who can beat that?

    Two things are certain. Americans will not stop spending, and they will have to get savvy in order to maintain their lifestyle. If Americans can't make more money, they will be forced to save money by making better choices and Amazon is a great way to do that.

    If we were talking about Nokia offering a windows phone and sleeping on the opportunity years ago I would agree with you since their business model is doomed to fail, but the future is Amazon and it's earning will only grow, and growing companies stock proces normally go up not down.

  • Report this Comment On January 19, 2012, at 10:46 AM, Dethklok wrote:

    Well said. Amazon is running web bubble 2.0.

    All the doom and gloom Best Buy stories fail to recognize if Amazon can run a sustainable business. It's not like Amazon is doing what Best Buy tries to, but is making more money.

  • Report this Comment On January 19, 2012, at 11:08 AM, TheDumbMoney wrote:

    Hey Travis,

    Amazon is like Costco except more disruptive. In fact its net margin and return on assets are higher than Costco's (at least through August). (It's asset turnover is lower.) ROIC is very similar. The point is they are comparable on some of those fundamental metrics. Meanwhile Amazon grew revenue at a 43% annual rate last quarter. It took a hit on earnings, but I'm done betting against this company. It now has the only viable tablet competitor to Apple, is the dominant online retailer, is supplanting eBay's (or should I say, Paypal's) online auction service, etc.

    Anyone who knows me on this site knows I'm primarily a so-called value investor. But while I get your points about Amazon (the 95 P/E is egregious), and think it could see a further drop on missteps (or perceived missteps), i think any weakness is a buying opportunity, just as in 2002, just as in 2008. It's easy for a value guy like me to get balled up in earnings and free cash flow, but when the reinvested cash flow consistently results in such higher revenues, the interim reduced earnings is an illusion.

    Yes the ding is that at some point Amazon has to "return something to shareholders," but that just begs the question of the illusory nature of earnings generally. What is a a return to shareholders? Would Amazon actually be returning more to shareholders if it reported higher GAAP earnings? Not at all: the only way a company actually returns money to shareholders is by dividends and buybacks.

    Returning to Costco, for years and years Costco has looked like a mess, because as a recent article pointed out, they are constantly looking for ways to reduce the margin on items they sell, i.e., ultimately their net margin and ROE. Yet it grows and grows and grows and people like it.

    Much the same thing is at work here I think. It took me eight years to figure it out. So naturally as soon as I post this AMZN stock is going into the tank and Bezos is going to be caught smoking meth with one of Gingrich's fifty mistresses.

    All best,

    DTAF

  • Report this Comment On January 19, 2012, at 11:50 AM, BoiseKen wrote:

    I looked at your profile -- doesn't look like you have a CAPS account -- why don't you red thumb Amazon to create a "moneyballing" record.

    "How will Amazon make money on streaming" -- I think this is a fine point -- for my money, I wish Amazon would dump streaming or go all in on it. For now, it is a really boring part of the Prime package. I can't easily streaming it to my TV, the content is horrible. Yawn!

    But, why didn't you mention a counter argument to Amazon's investment in massive fulfillment centers? Your entire argument is based on valuation -- missing this part of the equation is a big oversight in my opinion. Why don't you break out why Amazon would have in EPS without the investments and then tell us why the company is overvalued.

    Simply crying "high P/E" isn't much of an argument. I made the same mistake on CRM a couple years ago (in CAPS) -- the company doubled and more.

    Hope to see you on CAPS (where I have both NFLX and AMZN green thumbed up).

    boiseken, long AMZN

  • Report this Comment On January 19, 2012, at 12:28 PM, TMFFlushDraw wrote:

    @BoiseKen

    I do have a CAPS account (96.2 rating). It's linked in the disclosure and I guess my CAPScall was taken out in editing.

    http://caps.fool.com/player/tmfflushdraw.aspx

    Travis Hoium

  • Report this Comment On January 19, 2012, at 12:59 PM, BMFPitt wrote:

    @BoiseKen

    "for my money, I wish Amazon would dump streaming or go all in on it. For now, it is a really boring part of the Prime package. I can't easily streaming it to my TV, the content is horrible. Yawn!"

    I think the free streaming is really an inducement to get people to try out the more lucrative paid streaming choices. And it's easy enough to get a $50 Roku box and stream to your TV, among other ways.

    I love the company and I hope to see it drop below $150 so I can pick some up for my son's ESA, but right now it just seems too high.

  • Report this Comment On January 19, 2012, at 1:29 PM, DJDynamicNC wrote:

    Great analysis.

    I disagree with aspects of it - you didn't touch on Amazon's outstanding back-end server business and I think that Amazon is position itself for good long term growth overall - but the biggest part for me is the price.

    Is Amazon a great company? Absolutely. I love it, I love the service, I love the products, I use it all the time, and I think it has a great handle on planning for the future. Is Amazon a great investment? Sure. But is it $200 a share great? No, I don't think it is. Not with no dividend.

  • Report this Comment On January 19, 2012, at 2:05 PM, lucasmonger wrote:

    Whenever I shop at Amazon.com, I love the selection, but hate the cluttered website (the iPad app is much cleaner). I tried Amazon Prime for the brief trial period and although expedited shipping is nice, the streaming options were so limiting that I cancelled Prime. Amazon has knocked out Circuit City and Borders with Barnes and Noble and Best Buy both struggling. I don't see anyone else (Ebay, Overstock) in a position to challenge Amazon at what they do... so I put up with Amazon.

    Amazon needs to slowly revamp their website to be more modern without torquing off people like Facebook does every time they do a change. Slow methodical changes which over time clean up and streaming is the key. Anyone want to invest to create a new startup to go head-to-head against Amazon, but with a cleaner Apple-like user experience?

  • Report this Comment On January 19, 2012, at 3:56 PM, BoiseKen wrote:

    "I do have a CAPS account (96.2 rating). It's linked in the disclosure and I guess my CAPScall was taken out in editing.

    http://caps.fool.com/player/tmfflushdraw.aspx

    Travis Hoium"

    Awesome -- thanks for the link. I just hope your Amazon call doesn't burn your rating too hard ;-)

    BoiseKen, (Humbly sitting at 94.8 rating, http://caps.fool.com/player/boiseken.aspx)

  • Report this Comment On January 19, 2012, at 5:28 PM, Bwryan wrote:

    Perhaps I'm unique in that, as an avid bookreader in a family of avid bookreaders, I was already an Amazon Prime member before the streaming service was added. Its addition made that membership all the more valuable to me.

    As to its "very few attractive titles", as a non-Netflix customer I've been delighted to watch all my nerdy favorites: the first 4 seasons of the "new" Doctor Who, all the X Files, all of ST:TNG and so on. Maybe once I work my way through all the old TV content it will start looking less attractive.

    Mr. Hoium also seems to overlook that the value of the Kindle Fire is precisely in its primary focus as a portal to Amazon products and services. I think their sales strategy will prove very effective over the next several years.

    Bwryan (long AMZN, APPL and NFLX)

  • Report this Comment On January 19, 2012, at 5:35 PM, Brian9502 wrote:

    Dig deeper into the numbers, they are not counting on making money on retail, they are "The Cloud" everyone is migrating to. Its not a reatil play, its a cloud and managed services play.

  • Report this Comment On January 19, 2012, at 8:07 PM, MatthewHSE wrote:

    I'm a web developer and know something about what makes a good e-commerce site. Amazon has it nailed like few (if any) others. Their search is precise, the reviews are easy to find, and the related products are relevant. The ordering process could hardly be simpler. And you can be sure that every aspect of the design has been thoroughly tested and re-tested.

    Regarding Amazon Prime, remember that it *started* with free two-day shipping, and was later expanded to include free movies and TV shows (not the other way around as implied in this article). It appears to be working well for them, and I'm certainly happy with my Prime membership. And what could be simpler than ordering with one-click and knowing you'll get it free in two days or less?

    As far as the Kindle Fire is concerned, I'd say there's no way they're losing as much as is often quoted and my guess is they're managing a razor-thin profit on it. But that's just a guess.

    Finally, this article completely overlooks services such as Amazon S3 and its other web-based B2B offerings, now extending to enterprise email and now even database hosting. These services offer a huge opportunity for growth. You don't hear much about it outside the web development community, but there's a real move toward hosting entire websites on Amazon's services. A half-decent PR and advertising campaign could bring explosive growth in this area, as Amazon can offer performance and reliability of a caliber normally only associated with the likes of Rackspace, but for a small fraction of the cost.

    I think Amazon has plenty of growth ahead of them yet.

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