Amazon.com Inc. (AMZN, Financial) reported lower than expected top-line performance yesterday (granted revenue still grew 29% year-over-year), leading to a pre-market rout in the stock where $66 billion has come off the company's market value so far.
This was bound to happen and could get much worse if the company's stock is ever valued anywhere close to where its peers are priced. Despite the awesome value add it brings to the market, the company's stock is not a bargain now. Rather, it remains grossly overvalued, trading at 65x forward earnings, 25x book and 4x sales.
Amazon has long been the darling of Wall Street. In fact, right now there are 42 analysts that have "buy" or "strong buy" ratings on the company's stock. These seemingly smart researchers have been jumping on the bandwagon at otherworldly price multiples for years, finally pushing the market capitalization past $1 trillion in September. But now that the stock has pulled back close to 20% from the all-time high, analysts at Morgan Stanley, Barclay's and UBS have reaffirmed their buy ratings.
Looking at the recent guru investor activity, though, most top money managers have been taking profits in Amazon. In the last quarter, Bill Miller, Chris Davis (Trades, Portfolio), Stephen Mandel, Leon Cooperman (Trades, Portfolio) and Wallace Weitz (Trades, Portfolio) reduced their stakes in their latest SEC filings. If money managers continue to sell the stock, analysts will eventually start changing their tone too.
Of course, at the center is one of the best business leaders of all time, and recently minted wealthiest person on the planet, Jeff Bezos. What's incredible about Bezos is that he probably isn't thinking about this short-term volatility at all. From all the data I've gathered and interviews I've seen, he's truly a long-term oriented manager. And, at just 54 years of age, he has decades left to build Amazon into the world's largest organization, which is likely to happen.
The company's e-commerce platform is simply the backbone for its long-term product and service pivots. Amazon Web Service accounted for 56% of the entire company's operating profit in this latest quarter. Amazon's advertising business could generate over $10 billion this year. Both of those segments have much higher margin rates than the retail side of Amazon.com.
The problem is the same today as it was in my last article. Investors are continuing to pay up for financial performance that won't be realized for many years to come. In fact, since July of last year, the stock has doubled in price, but the company has not doubled in value. While I love the service Amazon delivers, from an investment standpoint, it makes no sense at all.
The company's expected earnings for 2019 range from $20 to $30 a share. Let's say that 2019 is the year gravity takes over and finally pulls Amazon's outrageous valuation down to normalized levels. Remember, Amazon only missed on revenue. The company's top line beat pretty handily, booking earnings of $5.75 per share in this latest quarter. Trading at 65x earnings on $20 a share would still keep the stock above $1,300, but even that multiple is too high because the company won't be able to grow at 30% year over year forever.
It's inevitable that Amazon will trade at multiples in line with the other big technology names like Microsoft, Google or Apple, who all trade with forward price multiples around 25x. If Amazon does earn $30 a share in 2019, but gets valued on par with its peers, the stock would trade around $750 a share. I don't believe that's likely to happen unless we see a major market correction, but investors can still find better value elsewhere.
Disclosure: I am not or short any stock mentioned in this article.
Read more here:Â
Warren Buffett Teams Up With Dimon and Bezos: What to Make of Their Health Care Plans
