Does (AMZN) Have Any More Room to Grow? - Barron's

December 14, 2009 2:01 PM EST
Jeannette P. Rankin is quoted as saying: "You can no more win a war than you can win an earthquake." Well, for (NASDAQ: AMZN), their current war is with Wal-Mart (NYSE: WMT) and it involves books and DVDs, a nicer alternative to bullets and bombs. Now, they are in a Holiday pricing battle that may affect what Wall Street expects to be a blockbuster fourth quarter, Barron's reports. Wal-Mart is also pulling a coyote by taking a loss on sales from their internet store in hopes to take market share from Amazon, and offset the current losses with solid brick-and-mortar store sales.

Amazon, current price of $130.56, is trading at about 69x FY09 EPS estimates, and 52x FY10 EPS estimates. Wal-Mart, the growth story of the 1990s, laid a format for potential loss while investing in a solid growth company. Earnings tripled and revenue has more than doubled over the past decade, and yet the shares have dropped from a high of $69 in 1999. Why? Because investor’s bought in to a highly valued company with little room for the stock to move.

A Needham analyst puts it quite succinctly, stating that Amazon’s growth prospects are outstanding, but they are not limitless. The analyst downgraded the stock from Buy to Hold in mid-November. It should be noted that most analysts upgraded the stock through the same period, probably in anticipation of a stellar Holiday season.

Barron’s calculates Amazon’s growth over the next decade assuming a 25% per year increase. They see annual revs of $224 billion by 2019 and EPS of $19, both numbers are unlikely to be reached.

Pre-tax operating profit for Amazon is 4.6%, below that of Target (NYSE: TGT) even though Amazon doesn’t have to build stores, and hire excessive staff. Market cap for Amazon is about 2x estimated FY09 sales, compared to Target and Wal-Mart’s estimate of one-half.

Investors bullish on the company see Kindle as a solid growth product, selling about 500,000 this year, and having a potential for millions more in sales of books and subscriptions.

Amazon has a P/E ratio of more than double the other high-growth company’s Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL).

Amazon also decimated estimates for the last quarter by reporting revs of $5.4 billion and an EPS of $0.45, up a dime on the Street consensus. Thus, the stock surged from $93 in October to what it is today.

In terms of earnings, many on Wall Street exclude restricted stock that vests over several years. This year looks to see grants of about $700 million, after the company issued 7.3 million shares in 2008 and 5.3 million YTD in restricted stock.

Overall, Barron’s believes that Amazon should be trading something closer to $100, and anything other than ultra-positive news may send the shares tumbling back to reality.

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