By Kathy M. Kristof
Kiplinger's Money Power
Widely admired for proving that e-commerce can work for everything from books to bling, Amazon.com Inc. (Nasdaq: AMZN) is clearly a great company. But after rising sixfold from its late 2008 low, its stock is in territory reminiscent of the great Internet bubble of the late 1990s.
How pricey is the stock? At a recent $173, it traded at nearly 87 times projected 2012 earnings of $2 per share. That's a huge premium to the stocks of other online consumer firms, such as Priceline and eBay, which sell for about 15 times earnings.
Amazon is the leader in e-commerce, with estimated 2011 sales of some $49 billion. And now it is taking on Apple with the launch of its Kindle Fire e-reader. The Fire includes key enhancements from previous Kindles and, at $199, is less than half the price of Apple's iPad. Analyst Mark Mahaney, of Citigroup, estimates that the company will sell 12 million Fires in 2012.
But analysts suspect that every Fire is being sold at a loss. In fact, for all of Amazon's prowess at producing sales, its profit margins are razor-thin. And that's part of the firm's strategy. CEO Jeff Bezos has told analysts that he plans to keep building infrastructure until revenue growth starts to ebb.
As a result, says analyst Herman Leung, of Susquehanna Financial Group, you can't evaluate Amazon the same way you analyze similar stocks. He says he values Amazon based on projections of future free cash flow (cash profits left after capital outlays). On that basis, he expects the stock to sell for $260 in a year. "The company may look expensive on a price-earnings basis, but on that basis it's looked expensive for the past three years," he says.
Of course, that's the same sort of logic that analysts used in 1999, not long before Amazon's then-sky-high stock cratered. Is a repeat in store? Not likely, but some analysts question whether Amazon deserves its premium price. "Investors have been able to make a return on the stock, but it's not been driven by profitability," says analyst Kerry Rice, of Needham & Co., who rates Amazon a "hold." "We understand the potential. Now are we going to see the profits?"
Editor’s Note: Kathy M. Kristof is a contributing editor to Kiplinger's Personal Finance magazine.
