Submitted by Joel Laceda as part of our contributors program.
Amazon.com Explodes Higher, Is this a Blow-Off Top?
The latest quarterly release from Amazon.com Inc. (NASDAQ:AMZN) has gotten investors so excited they are bidding up the stock and causing a 1 day gain of approximately 10%.
- Amazon Shares Soar As Q1 Earnings Beat Estimates
- What To Expect From Amazon’s Q1 2016 Earnings
- The Future Is Now: Entering the Age of Autonomous Drones
- How Does Amazon Fare In The Indian E-Commerce Market?
- Amazon Vs. Alibaba: Revenue & EBITDA Growth
- Why Would Amazon Be Interested In A Stake In Mapping Company HERE?
Is it justified?
Personally, I love Amazon.com as a consumer. I’ve bought a ton of goods from the company and can’t say a bad thing about their service. The stock on the other hand is getting to be ridiculous.
The market capitalization of the company is now at $166 billion, for a company with no earnings. It trades at 17x book value and a PEG ratio of over 10!
What this means is that the company would need to generate massive amounts of growth over the next 5-10 years simply to justify the current price. It’s the greater fool theory, buying the stock today and hoping that someone else will pay a higher price.
As a shareholder, you are a part owner of a business and the stock price is the discounted level of future earnings and dividends. Amazon.com has neither earnings or dividends.
Essentially, they lose a tiny amount of money on every sale. No wonder other businesses can’t compete, since this is unsustainable over the long-term.
The reason why investors are buying the stock is that they are hoping at some point Amazon.com will stop spending money in expanding and start earning a profit. So far, I’ve seen nothing in their guidance to indicate that this will occur anytime soon.
For the latest quarter, net sales were extremely strong up 24% year-over-year at $17.09 billion. But the company incurred a net loss of $25 million during the quarter. The company also issued forward guidance that they might incur a loss for the next quarter, which is the holiday season. (Source: Amazon.com Inc, October 24, 2013)
If the company can’t even earn a small profit on $17 billion in revenue or during the holiday season, when will it come?
With the stock at stratospheric levels, as a new investor ask yourself; is this company really worth $200 billion? Maybe $300 billion? That’s a big number for a firm that’s incurring losses.
This is the type of chart that you should not short. While everything we’ve discussed might lead one to think about shorting, don’t. The stock has far too much momentum currently. We need to see aggressive sellers emerge before considering going short.
For information regarding stocks we do like, check out our Flagship and ETF Newsletter.
This is a cursory look at Amazon.com Inc. (NASDAQ:AMZN) and we are not making any specific buy or sell recommendation but merely voicing our opinion of the current situation. Each individual investor must conduct their own due diligence of both the company, the market sector as well as their own financial situation and risk parameters.