Amazon Game-Over

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Nov 27 2006
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Amazon is an over-hyped, overpriced stock, with an over-ambitious management team that routinely over promises profits – that’s what some of the analysts feel.

This quarter has been particularly good for Amazon (Nasdaq : AMZN) when it reported net income of $19 million or 5 cents a share, beating estimates by 2 cents, on sales of $2.31 billion.

However analysts are shying away from Amazon reasoning it hasn’t proven that it can grow profitably, operating margins slipped to 1.7%, from 2.2% last quarter and 3.0% in the year-ago period. Worst still gross margins also slipped 1.1% year-over-year to 23.8%.

There’re some issues which need to be tackled if this stock needs to shine again. To begin with, Amazon’s free shipping program is very costly and continues to pressure margins. Amazon’s entry into the low margin grocery business certainly won’t help matters. Added expense of promoting new business areas (recently auto parts business) is another bottleneck to its profit.

Amazon moved too quickly in unveiling its video downloading service dubbed Unbox. Negative reviews and numerous glitches only invites Apple (Nasdaq : AAPL) to smilingly taking it to Amazon.

Trading at 48 times estimated 2007 earnings of 70 cents per share makes Amazon not attractive at all. As comparison, Google (Nasdaq : GOOG) trades at a modest 35 times year-ahead projections only.

As far as option trading on this stock is concern, Amazon does not present an attractive price-opportunity for investing. For the last 10-days, it is trading within range of $ 42 to $ 43. FinanceTwitter would be more comfortable investing “Puts” as the upsides are rather limited.

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