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Amazon's Stock Is Overvalued, Overloved

BOSTON (TheStreet) -- In the early 2000s, Amazon (AMZN) distinguished itself as a dot-com survivor, emerging from the tech wreck bloodied, but unbowed. Today, it is among the most powerful companies on the Web. Superlative inventory management, low pricing and innovative rewards programs have helped Amazon propel revenue 32% a year since 2008. Despite Amazon's outstanding fundamentals, its stock is overvalued and overloved.

There are signs that the growth trajectory at Amazon is tapering. Whereas sales expansion remains brisk, hitting 36% in the seasonally strong fourth quarter, profit growth was marginal. Amazon's quarterly net income rose 8.3% and earnings per share ascended 7.1%, earning a growth score of 1 out of 5 from TheStreet Ratings' quantitative equity model.

Traditional valuation measures, such as price-to-earnings and price-to-book ratios, demonstrate a still-sizable growth premium for Amazon. Its forward earnings multiple, at 42, book value multiple, at 12, and cash flow multiple, at 24, are all more than triple their respective S&P 500 averages. Amazon, with an $83 billion market value and $34 billion of 2010 sales, is a large-cap trading like a fast-growth small-cap.

Of note for tech enthusiasts: Amazon is considerably more expensive than Apple (AAPL), a company with superior growth rates, substantially wider margins, more than $60 billion of net cash and the best analyst sentiment in the market. Perhaps most telling is Amazon's PEG ratio, calculated by dividing its trailing P/E by researchers' long-term growth forecast. The PEG ratio, popularized by mutual fund legend Peter Lynch, is ideal for valuing growth stocks. Amazon's, at 3.2, suggests that its equity may be overvalued by as much as 70%. Granted, the outlook for Amazon's growth varies widely and its stock may continue on its meteoric pace, having returned 25% in the past 12 months. But, surfeit optimism often provides a set-up for disappointment and an accompanying stock drop.

Two prominent equity researchers disagree on Amazon's future. Goldman Sachs ranks Amazon's stock "buy" and forecasts it will advance 22% to $225 in the next 12 months. In contrast, Credit Suisse rates Amazon "neutral" and believes it's fairly valued, currently, at $185. Going further, boutique researcher BGC Financial has a "sell" rating on Amazon and a $125 price target on the stock, suggesting that it may fall 32% over the next 12 months.

In a note issued April 11, BGC warned clients that slowing revenue growth may be evident in Amazon's first-quarter report, due April 26, and advised them to avoid the stock. Although BGC expects sales to increase 30% from the year-earlier quarter, it's expecting a tough sequential decline of 28%. Its sales forecast, at $9.3 billion, is well below consensus.

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