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Tickers in this Article: AMZN, BKS, EBAY, OSTK
Amazon (Nasdaq:AMZN) continues to confound skeptics with its stock performance. In a horrific economy, with wreckage all over the place, the online retailer's astonishing share-price gain of 300% since November harkens back to the go-go days of the internet boom. Unfortunately, those times also included companies that were vastly overvalued. Trading at $82 a piece, Amazon stock could qualify as a member of the club, too.
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Don't get me wrong, Amazon has a lot going for it. Unlike peers Ebay (Nasdaq:EBAY), Barnes & Noble (NYSE:BKS) and (Nasdaq:OSTK), whose sales have taken a dive as a result of the global recession, Amazon is enjoying strong revenue growth. Even so, the stock is trading at an awfully hefty forward earnings multiple, leaving little room for disappointment or error.

Wall Street's Predictions
Wall Street analysts reckon Amazon can deliver earnings per share for this year of about $1.64. But, for argument's sake, imagine that the consensus estimate is conservative. Instead, let's assume that Amazon will earn at least $1.84 a share this year. If it does, it is trading at a whopping 48 times 2010 earnings. And, so as not to rely on Wall Street forecasts, let's make our own projections. (For more, check out A Case Study: Earnings Manipulation And The Role Of The Media.)

Future Outlook
Amazon's numbers from its latest earnings report show that Amazon's revenue is growing at over 20% per year, while its operating profit margins are about 4.5%. Let's be generous and assume that Amazon can deliver 25% revenue growth. And let's assume it manages to squeeze out more profits this year. After all, margins on Amazon's fast-selling handheld electronic reading gadget, the Kindle, are expected to be generous. So, let's say that operating profit margins rise to 5.5%. How much income will Amazon make in the coming year?

2009 revenue (25% growth): $23.96 billion
2009 operating income (5.5% margin): $131.78 million
2009 net income (40% tax): $79.06 million

Bottom Line
The company currently has about 429.7 million shares outstanding. So, the fully-taxed earnings per share forecast for 2009 would be about $1.84 per share. At its current share price of $87, Amazon is trading at 48 times our generous 2009 earnings per share estimate. In this shaky market, a company growing at Amazon's rate, could be fairly priced at 30 times. In other words, investors could be looking at a downside of 38%. I'd say that's a risk that's too big to take. (For more, see Can Earnings Guidance Accurately Predict The Future?)

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