Mad Money host Jim Cramer is bullish on shares of Amazon.com (AMZN). Analysts keep raising price targets on the stock. Bank of America/ Merrill Lynch has a buy rating on the stock and has upgraded shares to $190. Deutsche Bank raised the price target to $186. Caris rated Amazon’s shares a buy and increased its price target all the way to $190.
Let me tell you why I think that all of these upgrades are a mistake.
As a contrarian investor, I am always skeptical when every analyst jumps on board the upgrade bandwagon. Analysts tend to act like sheep. When one analyst upgrades a stock, the rest rush to follow suit. I remember all of the analysts that were upgrading tech stocks despite wildly insane valuations. I also remember television stock experts saying that Lehman Brothers was a buy when it dropped to the $80’s in 2008. Those recommendations didn’t work out too well.
Here’s what I like about Amazon. Amazon is a great growth stock with a fantastic balance sheet. The company sells just about anything that customers want to buy on the Internet. Amazon has done an impressive job of expanding its brand in North America, Europe, and the United Kingdom. The company has a disciplined growth strategy and is executing it perfectly.
My problem with Amazon is that the company’s stock is just overvalued on a fundamental basis. The company has done such a good job of increasing top line growth that investors expect the same results quarter after quarter. This past quarter Amazon reported a 39% increase in sales and 16% growth in net income. Amazon has done so well that investors have bid the stock up far ahead of its growth rate.
Amazon’s shares surged over the $165 level in after hours trading. Shares of Amazon trade at 66 times the current year’s earnings. That’s an incredibly high valuation for a company that can conservatively grow earnings at a 30% clip. Also, the company’s margins are slowly declining. They were much weaker than expecting coming in at 3 and 4%.
As much as I like Amazon the company, the stock is trading too high. I am not willing to pay the huge premium to buy its shares. I would be looking to sell shares of Amazon at the current valuation. In my opinion, shares would be a value around $108.
Great post! Soon after the market crash, conservative investors wondered what happened. They invested in blue chip companies, yet they lost money. The problem was what you mention in this post – buying high.
The same reason I would stay away from Netflix, though I love that company!
I feel the same way about Netflix as well. Great company, insane multiple!
I agree. Amazon is a great company. It has great long term prospects. I want to own the company. But the stock price is just getting too high. I have learned to stick with great companies even as the stock price seems to get too high to me (as many times I have left too many gains on the table). But Amazon is very close to going beyond too high, to ridiculously too high. In a situation like this one option is to sell a call option so you get some cash up front, and if it goes up more you may well be sold out http://investing.curiouscatblog.net/2010/10/21/selling-covered-call-options/
I figure trim the position and take some profits. Then on a down day you can always buy a smaller stake at a lower price.
it’s tough because once one of these tech-related stocks (and can we really call AMZN “tech?”) gets on the love wagon, it’s tough to knock it off. it’s tough to short in this market especially a market leader.
I don’t own AMZN stock because like you, I prefer to have made that decision a long time ago but since it now is a hot stock, i will stay away and accept the fact that I did not participate.
RIMM on the other hand, is done. It might flail but in the medium term, it is mostly over for them. Surveys show most bberry owners will switch to Android or iPhone next time around. I have no position (yet) in RIMM.
As opposed to Amazon, which every Christmas, more and more people continue to use it instead of driving to the mall. I have bought more from AMZN this year than any other year.
Chris, that’s exactly why I wouldn’t try to short Amazon and will not buy it either. It’s overvalued on a fundamental basis but people love the stock. I list it as tech because it is traded on the NASDAQ and relies on technology (the Internet) to sell it’s products.