January 21, 2017
Amazon: Evaluation too High?
Amazon is set to report earnings February 2, 2017 which may mark Amazon’s best quarterly performance to date. But investors should be cautious buying into the companies already high evaluation. Over the last 36 months the stock has climbed from around $400.00 to over $800.00 per share, effectively doubling the market cap which currently sits at $383 billion. The shares closed Friday at $808.33.
I used Amazon services to do much of my shopping during the Christmas season and will continue to purchase items throughout the year. The convenience of being able to order in one place and have items shipped to my door has made shopping easier. Amazon’s fulfillment services have been amazing and I have no problems to report. Simply put I love what the company is doing and believe they will continue to perform well in this aspect.
One area which I don’t believe is warranted would be the $383 billion-dollar evaluation. Amazon reported FY’15 revenue of $107 billion. Even if FY’16 tops $130 billion the company is forecasted to earn between $4.50-$5.00/share. This would give the company a Price to Earnings ratio (P/E) between 161-179. Although the future of growing revenue and earnings appears promising one should consider if the $808.33 price per share is justified.
As one should expect with growth stocks Amazon does not pay a dividend to shareholders. Amazon also has the lowest net profit margin of the top 10 highest market cap stocks on US exchanges. It is worth noting that none of these companies share the same type of business as Amazon but 60% of these companies do pay a dividend to shareholders (Apple, Microsoft, Exxon Mobil, Johnson & Johnson, JPMorgan Chase, Wells Fargo).
I like to compare Amazon to Wal-Mart as both companies have high market caps and share similar business attributes selling various products to consumers. As of closing Friday, Wal-Mart’s share price was $67.18. The company has a market cap of $206 billion, which is 46% less than that of Amazon. Wal-Mart also has a more reasonable P/E between 14-15, more than 11 times less than Amazon. Furthermore, the company pays a dividend of 2.98%. For revenue, Wal-Mart FY’15 was $482 billion, 450% higher than Amazon’s.
Some other red flags regarding Amazon is the new political landscape under a Trump administration. During Trump’s campaign, Trump had a few harsh comments regarding the taxation of Amazon which could resurface and hurt the stock price. Another potential red flag is Amazon’s online selling can be copied by other businesses. It is also possible the market place of users may find it more attractive driving customers to their own websites instead of competing with others on Amazon. Any of these situations can drastically change the growth prospects for Amazon.
Simply put Amazon isn’t ready to support an $800 price tag or $383 billion market cap. Even some of the best companies (ie. Apple, Microsoft, Berkshire Hathaway) do not trade at 160-179 P/E’s. If you do play the game, consider protecting from the potential of a 50% correction or more in the stock price. Disclosure at the time of writing I have no position in Amazon.
Disclosure: I have no position in Amazon at the time of writing.