Amazon.com (AMZN) was a solid winner in 2010. Now that the market is set to correct, AMZN could (should?) follow.
One-Year Chart
AMZN was a solid winner in 2010. In the one-year chart profits grew 61% and 41% during the first two quarters of the fiscal year. Then profit growth slowed, but the stock kept climbing.
Amazon is spending to grow its international infrastructure (warehouses that store and ship goods) which will lead to global domination. The problem with this growth model is it forgoes short-term profits for long-term growth.
Earnings Table
Profits are expected to fall 8% this quarter — so headlines shouldn’t be great.
Not only that but annual estimates and quarterly estimates all declined since AMZN reported last quarter’s profits on January 27th.
During the last four quarters 2011 estimates have gone from $3.91 to $3.53, $3.48 and $3.20.
With a P/E of 55 and profit estimates falling, this stock isn’t going to take off anytime soon.
Looking ahead to future quarters, profit growth could be very solid — with 46% growth expected four quarters from now. Since that’s the 4th quarter of 2011, analysts will be looking to 2012 estimates to calculate a fair value.
In a nutshell, it looks like AMZN stock will drop now and turn higher by year-end.
Wow, there’s a lot of red in this earnings table, I’m surprised the stock has been doing so well.
Fair Value
AMZN is really overvalued right now, but the best stocks should get higher P/E’s than they deserve (see Stocks for the Long Run by Jeremy Siegel). The stock could be around this price a year from now.
Bottom Line
The bottom line is Amazon is a great company poised for worldwide dominance. The stock is a must-own if we get an opportunity to get it at a good price. I think we will get our opportunity during the next few months. $128 is the right price to pay.
