Thursday, July 27, 2006

Amazon Overview

We looked at Q1 earnings sometime back. We found that Amazon margins are lower and the stock price a bit high compared to some of its competitors. Last week, reported Q2 earnings and the stock dropped by about 28% immediately after the report.

Let us take a look at the earnings and see if it is a buy at these prices. The stock is still pricy with a trailing P/E of 34. From an earnings perspective, this puts Amazon in the same ball park as Yahoo!, Ebay and even Google. Other star tech companies such as Microsoft are much cheaper while boasting of much better balance sheets.

The operating income was 2.19% of the revenues which significantly deteriorated from the operating earnings from the year ago period. The increase in technology spending is causing the marging erosion at Amazon.

Although the sales are increasing, the company is trading at a significant premium given the fundamentals. The premium is likely because of the internet premium attached to companies such as Yahoo! and Google. This premium is not justified and Walmart and Target have better businesses with better profit margins. Although short term stock movement is difficult to predict, the upside in Amazon over a longer time frame is very limited or non-existent.

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