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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Amazon, Still Overvalued

After smashing earnings, how much higher can the stock move?

April 26, 2019 | About:

Yesterday, Amazon released its first-quarter financial results, and they were impressive. The company reported better-than-expected earnings per share, beating by $2.44 with revenue in line with estimates, good for 17% year-over-year growth. And, the best news, at least for consumers, is the announcement of Amazon’s shift to one-day shipping for Prime members.

Real value doesn’t seem to matter for the company at this point. As long as Amazon (NASDAQ:AMZN) continues to book growth, Wall Street will continue to place ridiculous price multiples on it. Even by tech industry standards, Amazon is overpriced; however, the company is not a technology company. For one, it has over 647,000 employees. That’s more than Apple, Microsoft, Oracle, Google, Facebook and Intel combined. Yes, that's less than Walmart’s 2.2 million employees, but the Seattle-based firm is more akin to the Bentonville retailer than any of the tech firms above.

Second, the company relies on product sales for about 87% of revenue with $7.7 billion of its $59.7 billion quarterly turnover coming from AWS. So, if the market is going to put a 40x forward price-earnings multiple or 4x the price-sales rate on anything, it would be AWS. The remainder of its business should be more closely valued to its larger (at least by sales volume) Arkansas competitor, which is still growing as well thanks to its own improvement in e-commerce. That would mean pricing the stock based on its retail operation at 0.50x sales.


If Amazon generates $200 billion in sales from its online store, that value should be no more than $200 billion, and I think that's generous seeing as how Amazon virtually owns the space and should lose market share over time, even if the overall pie gets larger. That leaves $30 billion to 40 billion from its technology services, putting its overall value in the $500 billion to $600 billion range.

With Amazon’s market capitalization approaching $1 trillion again, investors are paying an 80% premium all because it is expected to continue to book torrid growth. But, for how long? At some point, American consumerism will fall off a cliff. Obviously, Amazon will still likely be in a leadership position when that happens, but remember one of my favorite quotes from Warren Buffett (Trades, Portfolio):

“The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

- Forbes 1979

And, while it would be very brave to short the stock, it seems like too many investors remain certain that Amazon will keep the pedal to the floor on growth.

Disclosure: I am not long or short Amazon. 

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About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

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