Tickers in this Article: AMZN, AAPL, EBAY, BKS, EXPE
Online e-tailing giant Amazon (Nasdaq:AMZN) reported first-quarter earnings that would be the envy of many companies today. For the first quarter ending March 31, 2010, Amazon reported that sales were up 46% versus the year ago quarter. Very few companies can grow top line at this rate at level - Amazon did so to the tune of $7.1 billion in sales, versus $4.9 billion a year ago. As one works down the income statement, the figures just got better. Yet shares in Amazon took a dive after the earnings report.

IN PICTURES: Eight Ways To Survive A Market Downturn

Just Not Good Enough
On top of the sales surge, operating income was up by 62% to $394 million versus $244 million in the 2009 quarter. And net income increased by nearly 70% to $300 million, or 66 cents a share, compared with $177 million, or 41 cents a share a year ago. For the second quarter, Amazon guided a sales increase of 31-44% and a 40-100% increase in operating income. Even still, Mr. Market was not happy with these assumptions, and punished the shares as a result. Apparently, these numbers indicate slower growth at Amazon and the fact that the operating income growth range is so wide is cause for concern. (For more, see Zooming In On Operating Income.)

More to the Story
As wonderful a company Amazon is, it is also one of the most expensive stocks around today. It currently trades at a earnings multiple of 73. Any company with that type of valuation is priced for perfection, and we all should know that no company is perfect. Also, despite being an online based company, Amazon has incredibly low margins due to its intense focus on customer service and offering the lowest prices around. On $7 billion in sales, $300 million in net income represents an approximate 4% net margin. Compare that with eBay (Nasdaq:EBAY), which has net margins above 25% or even Expedia (Nasdaq:EXPE) at 10% net margins. Even bricks and mortar book company Barnes and Noble (NYSE:BKS) has net margins of nearly 2%.

And then there's Apple (Nasdaq:AAPL) and its new e-tablet, the iPad. While Amazon does not disclose individual sales numbers for its number one selling product, the Kindle, the iPad's growing popularity is a big threat to the future of the Kindle. And with Apple shares trading at only 25-times earnings, despite its staggering growth, Amazon shares look all the more expensive.

The Bottom Line
As much as the world loves Amazon and the services its provides, at the current valuation, it's hard to find anything to love about the stock, no matter how well the company operates. (For more, see Equity Valuation In Good Times And Bad.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center