Tags: Amazon | stock | unsustainable | levels

CNNMoney’s La Monica: Amazon Stock Set for a Drop

By    |   Friday, 07 September 2012 08:04 AM

Shares of Amazon.com have soared to unsustainable levels amid excess enthusiasm for the company’s impressive performance and products, says Paul La Monica, assistant managing editor of CNNMoney.

“I love Amazon.com. Fantastic customer service. Prices are great,” he writes.

“But my appreciation for Amazon as a company does not extend to Amazon's stock.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Amazon’s future price-to-earnings (P/E) ratio, based on 2013 profit estimates, has jumped above 100. And the share price has surged 40 percent so far this year.

Despite Amazon’s technology ties, it’s really just a retailer, La Monica says. So it’s hard to justify the lofty valuation. Amazon’s P/E ratio is more than seven times higher than stalwarts Wal-Mart and Target.

And it’s not as if Amazon’s profits are all that hot, he notes. Its net profit margin registered a paltry 0.5 percent in the first half of the year.

“Investors are getting too caught up in the enthusiasm about Amazon's Kindle business and its small but growing cloud services division,” La Monica writes.

“Amazon may not be as much of a bubble as the stock was back in the late 1990s … But it might be getting close.”

Unlike La Monica, Morningstar analyst R.J. Hottovy thinks the company’s shares are near fair value.

“Amazon's low-cost operations, network effect and laser focus on customer service provide the company with sustainable competitive advantages that traditional retailers cannot match,” he writes. “This should yield additional market share in coming years.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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