The CEO of Amazon.com Inc. (AMZN), Jeff Bezos, is focusing on a strategy that maximizes free cash flow, and he is not so much concerned about profits for the time being. Bezos wants Amazon to have a larger share of the worldwide e-commerce pie which is expected to be worth $1 trillion in 2016, according to a stock analyst at Morgan Stanley.
Opportunities and Challenges
Customers are increasingly moving online for their shopping needs, as reflected by Cyber Monday last year and the results from the holiday season for which Amazon recorded blockbuster sales. All this bodes well for Amazon, but there is significant competition from the likes of eBay (EBAY) and Wal-Mart (WMT) who are testing a same-day delivery model. Additionally, traditional retailers such as Target (TGT) and Best Buy (BBY) are offering a price matching policy to keep customers from purchasing at a discount online.
The cost pressures are going to drag down margins even further. For instance, Amazon spends $700M on content costs annually, but this is small change in comparison to Netflix (NFLX) that spends nearly $2.5B on content costs.
Valuations: Even Seeking Alpha gets them wrong from time to time
A comprehensive valuation was done on Seeking Alpha about two weeks ago that revealed a valuation range of $184-$254 per share, but Amazon’s stock is already beyond that and touching $270 a share. Valuation is very subjective and, it may not always get the job done. The net profit margin of -0.76% and the Return on Average Equity of -14.60% are not particularly concerning after you take into account that Bezos wants drastic growth at the expense of profits. The extremely high P/E of 3581.13 and the EPS of 0.07 reflect this.
Technical analysis reveals that the stock is a "buy". Anytime you have a stock that has broken over its 50 day moving average and stayed way above its 200 day moving average, you know it is time to be bullish.
Source: Charts from DailyFinance
How to trade Amazon (AMZN) for the moment
25 research analysts have rated Amazon (AMZN) as buy. They include Goldman Sachs and Bank of America – Merrill Lynch. Most of these analysts have set a price target in the $300ish region. There were also quite a few "overweight" ratings.
The overall sentiment is that the stock is a buy despite the low profit margins (operating margin of 0.93 and a measly profit margin of 0.07).