My Take on Amazon.com (AMZN)

Amazon.com (AMZN) is getting slammed in the market today. Right now, the shares are down about 13%. I hate to say this, but I think this is just the beginning. I love the Web site, but the stock is simply overpriced.
My concern comes down to the fact that while Amazon may be growing fast, it’s not growing that fast. For the first nine months of this year, sales were up 25.9%. I also don’t like the way Amazon uses gimmicky promotions like Amazon Prime to increase sales. These are nice to have but they cut into profit margins and you can only do that for a limited time.
Amazon’s gross margins seem to have stabilized around 25%, which is a good number but I doubt we’ll see much improvement. Net profit margins had been falling, but those too seem to have stabilized.
Wall Street has targeted a growth rate of 22%, which strikes me as a bit generous. Considering that we’re in a good economy, I’d say that Amazon’s true growth rate is closer to 18%. Let’s be very generous and say that Amazon will be able to maintain a 25.9% growth rate—the same as its sales growth for this year. Compare that with the fact that Amazon is going for over 42 times next year’s earnings and you can see how rich the shares are.
I’ll repeat what I said three months ago. Enjoy the service, but steer clear of Amazon’s stock.

Posted by on October 26th, 2005 at 12:58 pm


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