Amazon.com, Inc. (NASDAQ:AMZN) fell slightly after its earnings miss last week, but Wall Street analysts quickly began pounding the table for it again. They know something: if Amazon falls, so will the bull market.
Fewer things are working in the current market. Amazon is one of those few things. Since January 1, AMZN stock is up 33%. Year-over-year revenue growth continues to exceed 20% per year, and technology revenue is growing even faster than retail.
So, don’t worry about Amazon earning only $197 million over three quarters, they say, echoing the management line. Trust in Bezos. A Goldman Sachs Group Inc. (NYSE:GS) analyst even raised his price target to $1,275 in the wake of the miss.
Amazon, Yes, But…
Our Richard Saintvilus is among the AMZN stock bulls. Amazon doesn’t operate the way Wall Street analysts would like, he writes.
But, suddenly, it does. The idea of prioritizing top-line growth over profit is suddenly in vogue on Wall Street, so long as it’s Amazon doing it. Three-quarters of the 43 analysts are now screaming “buy,” while only one has moved from hold to sell.
In the near term, this is keeping Amazon shares up. An overnight plunge to $1,002 was quickly being back-filled. Amazon stock shares opened for trade on July 31 at $1,023 but have since retreated to just below $1,000. This gives AMZN a market cap of $480 billion, or 3.5 times sales. And, most of those sales are retail purchases. Given the earnings miss, we can barely talk of a price-to-earnings multiple any more. Okay, it’s 257.
Problems for the rest of the economy are now seen simply as further evidence of Amazon’s strength. Are Hispanic shoppers not shopping? They must be switching to Amazon. Is Amazon Web Services’ growth slowing? It must be time to buy Microsoft Corporation (NASDAQ:MSFT).
Amazon does not have any serious problems. Its growth is not about to slow down. But, AMZN stock is overvalued, by any conventional measure, and this should concern all investors. When analysts start hyping a stock they know is overvalued, what does that say about the rest of the market?
Amazon Is Not Perfect
Amazon is getting plenty of things wrong. But, analysts are dismissing these things as they missed so many things Amazon was getting right earlier in the decade, so they can convince themselves economic growth is accelerating and that the bull market will continue.
Social media is not an automatic winner for Amazon. The Alexa voice interface is over-rated (I have one and it is very limited). We are not all about to buy our clothes from Amazon.
Amazon is also facing more government scrutiny, especially with its planned purchase of Whole Foods Market Inc. (NYSE:WFM). It is probably overpaying anyway – Whole Foods sales are in a secular decline. Whole Foods also marks Amazon as an upscale retailer with high margins when it’s competing against lower-margin Wal-Mart Stores Inc. (NYSE:WMT).
The Bottom Line
Amazon now faces many challenges it did not face before.
First, cloud players like Microsoft are succeeding against Amazon by going “up the stack,” into applications. This is how International Business Machines Corp. (NYSE:IBM) claimed recently to be “beating” Amazon in cloud . (It’s not, by the way.) This doesn’t mean AMZN is losing, it’s just facing more competition.
This is also true in retailing, where Walmart is leading the charge against it. It’s true in the halls of government, where the charge of “monopoly” keeps getting tossed around by friends of AT&T Inc. (NYSE:T). It’s going to be true international, especially in Asia.
Amazon may beat all these challenges. But, AMZN stock is not going straight up as it does so.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
