According to analysts, we should be filling our boots with Amazon. The bulls argue that this e-tailer is a “special case”, buoyed not only by the habitually heady valuations of the tech sector but also its nearly unrivalled mastery of the online space. This is a nice story, but dangerous investment advice for four reasons.
Firstly, around 45% of Amazon’s turnover is derived from media products (books, music, DVDs and video consoles). All are presently changing from physical to digital content. The concern is that during this technology shift, the firm could lose a significant chunk of its market share to rivals such as Apple.
Secondly, the vast majority of the company’s profits are generated from debt-laden developed countries. This exposure has been helpful over the past two years while governments have doled out free money from their profligate stimulus packages. Now, though, the fiscal wallets are empty. Indeed, last week the United Nations warned that the global recovery is already losing steam, and that global GDP would slow in 2011. That will reflect reduced household spending due to higher taxes and austerity drives.
Amazon (Nasdaq: AMZN), rated a BUY by Jefferies
Thirdly, cut-throat competition is hotting up from the likes of discount king Wal-Mart, eBay and other online stores. So future improvements in EBITA margins (6%) will be nigh on impossible to achieve. Worse, it appears that all e-tailers may soon have to levy a new state sales tax in America, which will push up their prices.
Lastly, we come to Amazon’s astronomical valuation. Investors are pencilling in 2010 sales and underlying EPS of $34.1bn and $2.51 respectively, rising to $43.7bn and $3.47 in 2011. That puts the stock on mind-boggling p/e ratios of 70 and 51. To me this is bonkers, and reminiscent of the “irrational exuberance” of the internet bubble back in 1999.
I would rate the group on a 20 times EBITA multiple at best. After adding in the $5.7bn of net cash, that delivers an intrinsic worth of $107 per share. Don’t get me wrong – I love using its website. But I find it impossible to justify the company’s sky-high rating and targeted 20%-25% organic growth rates, particularly in such a challenging consumer environment.
Recommendation: SELL at $175