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Stock of the Day
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Amazon (AMZN)
Too Many People are Jumping on the Amazon Bandwagon
Amazon lit a big fire under its stock last week when it reported blockbuster earnings. Sales were up 28% and earnings rose 68% in the third quarter as the online retailer continues to execute with tremendous efficiency. Subsequently, Wall Street (no doubt a little embarrassed after Amazon beat their earnings benchmarks by a full 12 cents/share) has been fawning over Amazon's supposedly bullet-proof business model and dominant position in the marketplace. The stock is up 27% over the last week and the chorus of analysts setting a $150 price target has grown louder. Who said keeping things in perspective was easy?
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Investors have typically always liked Amazon as a company and as a stock. Jeff Bezos and his team continue to innovate with products like the Kindle and maintain their superior focus on customer service via programs like the recently announced same day shipping option in select cities. eBay (EBAY: Charts, News, Offers) has kind of fallen by the wayside as the auction business model has lost steam and novelty. There is no clear competitor to Amazon anymore. All the other internet shops are niche plays. Amazon is the only one-stop business out there. Plus it has entrenched technological advantages such as the massive collection of customer reviews for its various products and nifty features as the 'search inside this book feature'.
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But at the end of the day, it is still a retailer. It doesn't have a killer app or technology (Kindle doesn't qualify, numerous other products can be used as e-book readers) such as Google's (GOOG: Charts, News, Offers) search infrastructure or Apple's (AAPL: Charts, News, Offers) iPhone, which makes it absolutely irreplaceable. In the absence of Amazon, there will be still be other online retailers that you can buy stuff from. Hence, it is fair to ask whether the stock market is showing too much love to Amazon. Consider that the stock trades at a peerless price-to-earnings ratio of 70 and amid the toughest recession in decades, it just hit its all-time high outpacing the $106.69 mark it set in December of '99.
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One of the things that investors were especially impressed with was the increase in free-cash flow during the last quarter. As it turns out, according to the WSJ, not all of that can attributed to more efficient management. Some of the increase in cash flow was simply because Amazon was able to extract better terms from its supplier and take longer to pay them. Of course, there is a finite limit to how far suppliers can be pushed and Amazon might be approaching it soon.
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As far as the notion that Amazon has no great competition is concerned, that might be true but things could rapidly change if Wal-Mart, for instance, starts to take its online business more seriously. There is no customer loyalty on the web. Consumers will go where the cheapest prices are. And Wal-Mart (WMT: Charts, News, Offers) has an unrivaled ability and war chest to offer the cheapest prices. The recent book price war is a great example. Wal-Mart decided to cut prices on some coveted hardcover titles to $10 and Amazon had to follow. Yes, entrenched consumer behavior is a factor working against Wal-Mart. People naturally look for books on Amazon but that is a question of habit (it's not like people are passionate about buying stuff from Amazon like they are about getting Apple products) and those can be modified with aggressive pricing. Selling hardcover books for less than half of the publisher's fee is irrational but to modify an oft-used phrase, Wal-Mart can stay irrational longer than Amazon can stay solvent. The overall point is that while Amazon is no doubt a great company, it's not as indestructible as some people like to believe and its valuation is probably inflated and will continue to be throughout the upcoming holiday shopping season but after that, the stock may be due for a pullback.
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Other opinions on all things Amazon
Walmart, Target, Amazon: Book Price War Heats Up - More on the juicy book price war
A look at Amazon's growing third-party seller business - Aiming to become the Google of internet sales
Amazon's shares are hot, but success is here to stay - Many continue to remain bullish on Amazon
What else is making noise in the markets today?
SEC investigates Zale's accounting - Nothing good usually comes out of that
CIT in Deal With Icahn to Support Bankruptcy Plan - The small business lender continues to negotiate for its future
There's less to the third-quarter GDP numbers than meets the bulls' eyes - A note of caution from Barron's
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Click here to view a detailed profile of Amazon.
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