There's little argument that Amazon.com
So Amazon's growth prospects look strong, and that's one of the reasons it's considered a core stock holding on Motley Fool Stock Advisor. Yet that's only half the equation for investors deciding whether they should buy the stock now. It's not enough just to find good companies; you've got to get them at a good price, too.
Read it and weep
Some of my Foolish colleagues have come down on the "Amazon is fairly valued" side of things, but at $132 a share, I agree with those who say Amazon is no Black Friday bargain. Investors will do better if they flip the page and wait for better prices.
Amazon has been generating gobs of cash profits. At its most basic calculation, free cash flow grew 24% sequentially and nearly doubled from the same period last year. But with battles raging on many fronts, the e-commerce leader seems ready to fall.
Nor can we discount the impact the sub-$10 book is going to have on Kindle sales and e-book downloads, not to mention Sony
What price growth?
If we say Amazon can grow earnings at 20% annually for the next five years (analysts predict 25%, but let's be conservative) it will generate profits of almost $1.9 billion at the end of 2014. Slap a multiple of 30 on those earnings, add back in cash on the balance sheet, and we've got a company valued at around $60 billion. That's less than 1% annual growth, or a stock price of less than $140 a share.
Another bit of shorthand gives us owner's earnings of $533 million. Grow that 20% annually for five years, give it an overly generous multiple of 50, add back in the $4 billion in cash, and we've only got Amazon valued at around $66 billion, or 3% compounded growth from today. That's hardly the page-turner everyone's been talking about.
Foolish bottom line
Considering Amazon's long-term growth potential, David Gardner's right that the company ought to be a core holding for investors, and he just updated his outlook for the e-tailer in the latest Stock Advisor issue just released. You can access it here risk-free. However, I would argue that picking and choosing your entry points is part and parcel of investing, and Amazon's price is no gift this holiday season.
Fool contributor Rich Duprey owns shares of Wal-Mart but does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.