Selling AMZN Was the Right Call

On August 25th I sold Amazon.com (AMZN) for $125 a share. In the one-year chart that’s within that little base the stock made before it took off to $170. Although it seems I was wrong to sell, last quarter’s results confirm my thoughts — AMZN is overvalued.

Lots of Red

The one-year chart is showing lots of red. The most prominent is the 48 P/E, but that could be justified with profit growth in the 40-60% range (as AMZN had been delivering).

Last quarter Amazon put out 13% profit growth as revenue surged 39%. Now there’s a good reason profit growth was so small compared to the sales growth. Amazon is building new distribution centers around the world so it can sell more stuff. This spending is taking away from profits now, but should no-doubt help profits later.

Still, there’s a lot of red in the one-year chart. 13% profit growth last quarter and 12% two quarters from now sandwiching the 4% expected next quarter. Now if AMZN can beat the street then the stock might be worth it. Let’s check the Earnings table for the beat-the-street trend.

Amazon’s Earnings Table

Amazon beat by only two cents last quarter. So if I was to guess, I’d say the company might not beat by a big margin this quarter — but we are going into the holiday season and for the first time since 2007 people have money again. Not only is spending good, but the perception is holiday spending will be good — and the money managers who get on CNBC might pump up AMZN stock as their “retail pick for the holiday season”. I don’t think AMZN’s a good pick for the holidays, but further out it is.

This company is expected to make around two-fifty this year. Next year? Three-fifty. The year after? Four-seventy five. This is a big company and to have profit growth of 40% and 35% lurking ahead the next two-years is really nice. Mutual fund managers (especially growth ones) will be able to put a lot of money into AMZN stock. It fits the mold.

The Issue

The issue I have with the stock now is Amazon’s got a P/E of 48 and growth the next couple of quarters doesn’t look great. These estimates also came down (by 13 cents and 3 cents, respectively). Looking three and four quarters out growth is set to resume in a big way — but the stock already has a 48 P/E on 2011 earnings estimates, so I don’t see the stock appreciating much above that.

So in the end, I feel I was correct to sell Amazon when I did. Yes the stock’s more than 30% higher now, but that boost may be because the market was oh-so-into NASDAQ stocks.

AMZN is $168 today. It could be $168 a year from now.