Exactly one year ago, two of our finest Fools traded jabs and upper cuts over the fortunes of Internet retailer Amazon.com (NASDAQ:AMZN). Alyce Lomax thought Amazon looked amazing, while Chuck Saletta -- true to form -- saw an overvalued underperformer. Here's a quick recap before the real-world verdict.
Go, bulls!
When the battle bugle sounded, Amazon's stock price had just plunged more than 31% in the course of one week after a lousy earnings report. "I can't blame investors for getting tired of hearing about surging revenues at the expense of profits," Alyce said. "[CEO Jeff] Bezos continues to thumb his nose at profit margins as he invests in technology and offers low-priced (or even free) deals on shipping."
But she thought there was a method to the madness, as the company strived to lock in a long-term parking space in the hearts and minds of consumers through this deep-discount customer value campaign. It's a scorched-earth strategy not unlike what Blockbuster's (NYSE:BBI) Total Access program has been doing to rival Netflix (NASDAQ:NFLX) over the past couple of quarters. (Read on for a more in-depth analysis of the Blockbuster-vs.-Netflix feud.)
And speaking of the online movie-rental duopoly, Alyce noted the rumors of an Amazon-backed direct-download service and pointed out that Amazon is still thinking ahead and changing with the ever-in-flux Internet. And, while the trailing price-to-earnings ratio stood at 38 back then, Alyce said investors were paying a bit more for an undeniably great growth opportunity that made it all worth the steep valuation ratios.
"I think that Amazon investors' recent panic -- and the company's plunging stock price -- offer a splendid opportunity to buy into one of the Internet's most impressive companies," Alyce said to close the argument. "Amazon's not resting on its many laurels, and in my opinion, it has a bright future ahead."
Go, bears!
Chuck started off with a spirited defense of the conventional bookstore. As Amazon brought low costs and unparalleled selection to the world of book shopping in the 1990s, old-line stalwarts such as Barnes & Noble (NYSE:BKS) and Borders (NYSE:BGP) responded with online stores of their own, and sit-down coffee shops inside their physical stores. The incumbents were fighting back, and successfully so, Chuck said.
But Amazon changed, too, and grew into a general-purpose discount retailer akin to Target (NYSE:TGT) or Wal-Mart (NYSE:WMT), so it was against those retail giants that his valuation showdown took place. And the numbers didn't look good for the Seattle stalwart: "With Target and Wal-Mart, you get larger companies," Chuck said, "with somewhat stronger profit margins and better short-term earnings growth, trading at cheaper valuations, with lower dilution and higher yields. Though Amazon has somewhat better projected future growth rates, given this valuation data, I can't quite understand why anyone would invest at its current price."
The votes are in!
Our readers weighed in with their votes, and they couldn't quite pick an outright winner: 43% of 134 voters sided with Alyce's bull case, 46% took Chuck's bearish side, and 11% remained undecided. So, Chuck got the edge, but not with a simple majority.
As it turns out, this duel played out near the 52-week low in Amazon's share price. Since then, the value of the stock has increased by an astounding 199%, giving Alyce a very solid win on simple stock returns.
Our Motley Fool CAPS community remains unconvinced, though -- only 55% of more than 1,500 investors like Amazon's stock, and it's got a two-star rating out of a possible five. So on a one-year time scale, Alyce and the Amazon shareholders came out winners, but for the long term, Chuck still holds the popular vote and takes the crown.
A few Foolish thoughts
Your humble battle reporter would like to point out another way to think about Amazon. It's so easy to get caught up on P/E ratios and forget that it's an imperfect tool at best, and downright flawed when applied to high-flying growth stocks like Amazon.
Bezos is willing to sacrifice net profits today for sales growth and investment in future opportunities. It's very hard to bake that philosophy into a valuation ratio, though I'm inclined to look at operating earnings minus research and development expenses for this sort of situation. That way, you can compare the core operations without penalizing innovators for their inventive ways. Amazon still doesn't look cheap in that light, at 28 times R&D-adjusted operating income, but it was cheap a year ago at just 12 times that income.
Those R&D dollars have produced that long-awaited movie-download product and a slate of innovative Web-hosting services, and too many others to mention here. And from the looks of its most recent blowout quarter, those dollars have begun to pay off. The day Amazon stops "overspending" on R&D to bring up the net profit margin -- even though it would suck in a great deal of profit dollars over the short term -- is the day this company would be dead to me.
Further Foolishness:
- Amazon's Head-On Collusion with Webvan
- Amazon's Love/Hate Relationship
- The Highest Possible Returns. Period.
Amazon and Netflix are fellow Motley Fool Stock Advisor recommendations; Borders and Wal-Mart camp out over in Motley Fool Inside Value territory. Regardless of which way you swing, there's a free 30-day trial pass waiting for you right here.
Fool contributor Anders Bylund is a Netflix shareholder and a frequent shopper at Target, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is always worth fighting for.
