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Is Amazon Due For A Dip?

May 6, 2010 By Leave a Comment

Amazon (AMZN)

Citigroup recently placed a buy rating on Amazon and sees shares climbing an additional 25%. Goldman Sachs has upped the price target on Amazon to $180. Deutsche Bank has a $180 price target on the shares. Piper Jaffray has a $172 price target and a buy rating. Kaufman Brothers and FBR Capital have a $160 price target on Amazon’s stock. While Amazon is a fantastic company with a sustainable business model and increasing market share in the retail industry; now is not the time to buy Amazon.

The stock is trading at 34 times next years projected earnings and trades at 2 times sales. Amazon’s battle with Walmart has forced the online retailer to sacrifice gross margins for earnings growth. Gross margins came in at 22.9% compared with 23.5% last year. Now that Google will be selling digital books soon Amazon may see its margins squeezed further. Operating margins for books, DVD’s, and music have already dropped below 6% this year. In the past Amazon has traded at a premium multiple because of its high growth rate. Amazon grew earnings 45% over the past five years. EPS is expected to grow at half the rate in which it has over the past 5 years. Based on its five year EPS growth rate, you can conservatively place a 27.1 P/E on Amazon. Multiply that by the $3.91 earnings estimate and Amazon should trade at roughly $106 per share. Add in the cash on the balance sheet and Amazon is worth about $120.

My estimate is high according to an article in Barron’s. Singular Research sees a $40 price drop for Amazon valuing the retailer’s shares at $90. According to Singular, the “cost of capital of 9.65% and a long-term growth rate in after-tax operating income of 10%, (based on a reinvestment rate of 50% and a return on capital of 20%). After combining the present value of the interim cash flows and the terminal value, the current cash on Amazon’s balance sheet, less debt and option stakeholders’ claim on Amazon’s equity, we calculate a value of roughly $90 per share.”

I am not suggesting that you run out and dump all of your shares because Amazon still has a pristine balance sheet and a major competitive advantage over Ebay and other online retailers. I am suggesting that you should be careful with Amazon’s shares however because stocks that trade at premium valuations decline the most when the market drops.

 

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3 Stocks To Keep An Eye On

January 19, 2010 By Leave a Comment

1. Amazon (AMZN)- The ecommerce giant has been on a tear over the past year rising from the high 40′s to $127 per share. Many analysts have placed a buy rating on the stock and price targets keep going up. Forward earnings are expected to come in at $2.58. Price to earnings growth is 2.5. This stock is priced for continued earnings growth of 20% or more. I like Amazon’s business model but the stock is currently trading at 75 times earnings. Any hint of slowing earnings growth over the next year and Amazon’s shares will get hammered.

 

2. Research In Motion (RIMM)-Research in Motion appears to be fairly valued and has been one of the best tech companies of the past decade. RIMM grew its revenue by over 40% last quarter but the smartphone market is becoming a crowded place with increasing competition from Apple and Google. Palm has just signed a deal with Verizon to begin offering their smartphones at the nation’s largest wireless carrier. It appears that RIMM will have to increase spending on marketing just to maintain their current market share.

 

3. US Steel (X) – The nation’s largest steel company saw its shares decimated during the global recession. Shares have rebounded almost 300% from the $16 level. While I like US Steel as a long term holding; the stock has gotten ahead of itself over the near term. US Steel is trading at $65 a share and has a forward PE of 52. This is based on estimated earnings of $1.24. Some analysts are even anticipating a loss as large as $3 per share for 2010. If you were one of the smart investors that got in at $40 or below; it may be a good time to trim your position and take some profits.

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