Amazon May Be Flying Too High

 | Dec 03, 2013 | 9:00 AM EST
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At just a dollar shy of $400/share in Monday's session, Amazon (AMZN) has many investors and potential investors alike wondering if this goliath online retailer has what it takes to reach the heights of another famous internet name. That other name, of course, is Google. Google Inc. (GOOG) hit a record high of $1,068/share last week after surpassing $400/share as far back as 2004.

It's enough to certainly peak an interest, especially when investors take a look at Netflix (NFLX), The Netflix shares are hovering at just under the $400 price point and Netflix only competes with one segment of Amazon's market base. This, of course, is not what the professionals see, but it is what Joe Public sees.

What many would-be amateur investors don't notice on their charts is that in reality, Amazon has hit Google's heights and pushed even higher already.

Amazon shares split three times during the internet boom of the late 1990s. It began with a 2-for-1 split in mid-1998, followed by a 3-for-1 split six months later and a 2-for-1 split a mere nine months after that. That means that Amazon's high on Monday was actually $4,788/share if it were not adjusted for it splits vs, Google's un-split high of $1,068.

There are many more numbers behind those numbers, but if we take a layman's view, is Joe Public necessarily wrong? Does Amazon still look like a gold mine?

Perhaps the most notable aspect of Amazon's recent return to glory is that it is no longer merely a gold mine, specializing in just one field. It has branched out, expanding and diversifying beyond the constraints of being "merely" an online retailer.

While facing steep competition over the past several years, Amazon's Kindle tablets remain extremely popular and the company has fought its way into the arena of online broadcasting via its Prime instant video service. It recently acquired the rights to many popular shows from Viacom after Netflix let its own content deal expire. The company has also followed Netflix's lead to the creation of its own original programming with its first five shows slated to debut over the next several months.

"Why stop there?" asked Amazon. CEO Jeff Bezos, on the Sunday CBS news show 60 Minutes, offered us a glimpse into Amazon's future: drone delivery in 30 minutes or less! Ok, so I must admit that I think Amazon is getting a little ahead of itself on this one and the concept has raised more questions than Amazon has provided for answers: Drone ETA? FAA regulations? Bad weather? Flying targets? Theft? Battery life? The list goes on.

With all of these questions left unanswered, it has left me questioning Amazon's ability to hold onto its current market price. Typically, a stronger-than-average move in the markets takes time to correct and the trend may continue, but at a slower pace. Steep corrections such as the one experienced by Google in 2008, however, are not uncommon, particularly when investors are questioning a company's future.

These types of rapid corrections often occur when a high holds and the zone from that high is re-tested. This creates a type of double top in which the second high may be lower or slightly higher than the first. Afterwards, two waves of correction will generally follow, such as on the monthly chart of Google in 2008, before the uptrend even has a chance to resume. The questionable timing on the drones' announcement and even more questions regarding those pesky little other numbers I alluded to at the beginning of this article create a strong risk for just such a selloff in Amazon.

What are those other numbers? Well, one of them is earnings. Amazon has been unable to post consistent profits over the past several years. It ended last year in the red and this past quarter it posted a loss of 9 cents per share. Estimates for its fourth quarter performance vary widely. And while revenue has soared, so have Amazon's operating costs. Both grew by 24% in the most recent quarter.

I'll leave you with a few additional numbers as well: Amazon stock is trading at approximately 150x its expected 2014 earnings. Google, on the other hand, trades at closer to 20x its forward earnings. As far as investment opportunities go, Amazon is just too much of a risk for me at these levels and I'll be looking elsewhere for portfolio stocking stuffers.


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