A Reckoning?

I’ve been a critic of the valuation of Amazon (AMZN) and Netflix (NFLX), and I’ve been wrong as these stocks have climbed higher and higher.
Amazon, however, has finally disappointed the market. The company had another strong earnings report yesterday, but the earnings fell short of Wall Street’s expectations (45 cents per share versus 54-cent consensus). The stock was trading down over 10% in yesterday’s after-hours market.
This is the problem with owning a richly valued stock. Despite getting the enormous growth potential of the company, you always have to impress analysts. You have zero room for error. If you make one small misstep, you’ll be punished harshly.
Think of it this way. Amazon missed earnings by nine cents a share, yet the stock was down $15 a share. That’s the equivalent of a Price/Earnings Ratio of 166 for those marginal nine pennies. That’s obviously very high but that’s what you’re buying when you go after a hi-flier like Amazon.
Interestingly, late last year Amazon finally surpassed its December 1999 peak of $113 per share. After 9/11, the stock got down as low as $5.51. This past April, Amazon reached a high of $151.
Similarly, Netflix was hit hard yesterday due to slightly missing Wall Street’s revenue forecast. The WSJ even wonders if Netflix is the new Crocs. Ironically, Netflix is often mentioned as a potential acquisition candidate for Amazon.
Via Eric Savitz, I see that analyst Todd Greenwald notes that Netflix “spent $75 million to get 1 million net new subs in the quarter, after spending a comparable amount to add 1.7 million subs in Q1.”
Even after yesterday’s sell-off, Netflix is going for a 37 times this year’s earnings. That’s still way too high.

Posted by on July 23rd, 2010 at 8:29 am


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