Tags: Dorfman | Amazon | stock price | imbestors

Jeffrey Dorfman: Amazon Is on a Tightrope, but Where Is the Net?

By    |   Tuesday, 20 May 2014 09:36 PM

Is Amazon's high-wire act in danger of coming down to earth?

The online retail Goliath's profit margin is running about one-half of a percent — tiny by most standards — and if investors ever decide to apply the same fundamentals to Amazon that they do to most other stocks, the company could be in for a scary fall, according to Forbes contributor Jeffrey Dorfman.

Dorfman, a University of Georgia economics professor, noted Amazon’s biggest success has been in revenue growth — not in profits. Perhaps its second biggest success has been its share price, which reflects 600 percent in cumulative gains over the past decade even after a recent bout of weakness.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

“The question now is, are investors finally starting to evaluate Amazon’s stock price according to normal metrics, or will they continue to award the company a stock price with no relationship to business fundamentals?” he wrote.

In his Forbes column, Dorfman compared Amazon to former tech darling Cisco, which during the dotcom boom had similar soaring growth rates and a triple-digit P/E ratio and now has one in the teens.

“If Amazon is treated as a mature stock like Cisco, its price will fall a lot further; potentially its stock could go to $15-25 per share.” Amazon shares closed Tuesday at $301.19

He noted Coca Cola has slightly more than half the revenue of Amazon, yet earns nearly 80 times more profit. “Amazon is growing faster, but to produce the same dollars of profit as Coca-Cola, Amazon will need to hit revenue of $1.7 trillion given its current profit margin. That is over three times the size of Wal-Mart, so that is a very big revenue number.”

According to Dorfman, the fact Amazon is starting to have to pay sales taxes in more states could be a drag on its earnings going forward. Even if Amazon cuts back on its vaunted R&D spending, Dorfman sees potential profit pitfalls ahead.

“Amazon is already one of the largest retailers in the world when measured by annual revenues. That suggests that its growth rates will have to slow simply because it will run out of new markets to conquer at some point in the not too distant future.”

He concluded the future of Amazon’s share price depends on whether investors continue to give the stock a pass on normal valuations, or whether its valuation “becomes tied to the metrics used for other old, established blue chip stocks.”

Given the fact Amazon has now been a public company for 17 years, it gets closer each day to becoming an established blue chip name.

Wall Street Cheat Sheet had its own take on whether Amazon is headed for a fall. It noted the company’s earnings and revenues have both grown over the past four quarters, that it has now entered the television programming business, and concluded the jury is out whether the stock can achieve new highs.

The Analyst Ratings Network, meanwhile, reported that of dozens of analysts who follow Amazon’s stock, the average rating is currently a “buy.”

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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Is Amazon's high-flying act in danger of coming down to earth? The online retail Goliath's profit margin is running about one-half of a percent - tiny by most standards - and if investors ever decide to apply the same fundamentals to Amazon that they do to most other...
Dorfman, Amazon, stock price, imbestors
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2014-36-20
Tuesday, 20 May 2014 09:36 PM
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