Is Amazon a Broken Stock?

AMZN doesn't get the benefit of the doubt anymore

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AMZNChart2 300x201 Is Amazon a Broken Stock?
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After 14-plus years as a public company, it appears valuation finally might matter for Amazon (NASDAQ:AMZN). The stock has fallen sharply in the wake of Tuesday’s earnings miss, leading to rumblings that it is no longer worth a triple-digit multiple.

The debate about Amazon’s valuation has raged for years: The bulls say it’s destined to become the online Wal-Mart (NYSE:WMT); bears see it as just a glorified, overvalued retailer. The truth probably lies somewhere in the middle. But the more important question right now is whether the Amazon story is broken — and its valuation is an important piece of the answer.

This earnings season has seen the collapse — or continued collapse — of a number of high-fliers that have missed earnings or reported bad news. Most notable among these are Netflix (NASDAQ:NFLX), Green Mountain Coffee Roasters (NASDAQ:GMCR), Crocs (NASDAQ:CROX) and Research in Motion (NASDAQ:RIMM). All are classic “broken” growth stories now, where shares are down 50% or more and the chances of recapturing their past glory — and rich valuations — seem slim. On the other side of the ledger, we have Apple (NASDAQ:AAPL) and IBM (NYSE:IBM), which have held up well after missing earnings thanks to investors’ continued confidence in their management and business model.

The challenge is to determine in which of the two categories Amazon should be placed.

It might be too early to call Amazon a broken stock, as it held both its long-term trend line and its 200-day moving average on the post-earnings sell-off. From a fundamental standpoint, the 44% sales growth that headlined the report shows AMZN still is in its rapid-growth phase. Still, the days of putting Amazon in the same class as the Apples and Googles of the world appear to be over — at least for now.

Here’s why: After reporting sharply rising costs, Amazon now is a “show-me” stock. And not just any show-me stock, but one that’s still trading at 63 times 2012 estimates and with a PEG of 4.4. With this report now behind us, we enter a long wait-and-see period until the next report in mid-January. In the meantime, Amazon’s sales tax issue again is threatening to make headlines. Holding such a richly valued stock when it has something to prove, and when it has the potential to take a hit from additional negative news flow, is a dicey proposition.


Article printed from InvestorPlace Media, http://investorplace.com/2011/10/is-amazon-amzn-a-broken-stock-tech-stocks/.

©2014 InvestorPlace Media, LLC

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