Amazon Will Keep Its Teflon Valuation - TheStreet

Amazon Will Keep Its Teflon Valuation

Buoyed by growth fund purchases, shares will probably stay up regardless of the e-commerce company's report.
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Amazon.com

(AMZN) - Get Report

is slated to report its third-quarter results this afternoon, but the way things are going, the report may not have much of an effect on the company's stock, no matter how it turns out.

Despite continuing questions about Amazon's ability to turn a profit and its costly free-shipping program, the company's stock has soared this year. The e-commerce company's shares are now trading at 104 times projected pro forma earnings this year.

While the company's shares are clearly overvalued, they're unlikely to fall anytime soon, said Scott Rothbort, president of Lakeview Asset Management and a contributor to

Street Insight

. Instead, the stock is being propped up by the rash of money flowing into mutual funds that are willing to buy growth stocks at any cost, he said.

"Needless to say, I'm no fan of Amazon's," said Rothbort, who covered a short on the company's shares earlier this year and has no current stake in Amazon. But he adds, "People have fallen off the wagon again. We're in this 'Alice in Wonderland' world of valuations."

Amazon has been among the biggest beneficiaries of the stock market rise over the past year. Since the beginning of this year, the company's shares have risen 215%, far outpacing the gain posted by chief rival

eBay

(EBAY) - Get Report

.

The company has been able to point to improving results this year. Through the first half of this year, Amazon lost $53.4 million, or 14 cents a share, on $2.18 billion in sales. That compares with the same period last year, when Amazon lost $116.7 million, or 31 cents a share, on $1.65 billion in sales.

Meanwhile, the company's revenue growth rate has accelerated. In the first half of this year, revenue grew by 32%, compared with the 21% annual growth Amazon posted in the first half of last year.

The company and Wall Street analysts project the improved results will continue. Analysts surveyed by Thomson First Call estimate that Amazon earned 10 cents a share -- excluding charges -- in the third quarter, on $1.12 billion in sales. Meanwhile, Amazon projected it would post operating profits of $40 million to $55 million on sales ranging from $1.075 billion to $1.15 billion.

In the same period a year ago, Amazon lost $35.1 million, or 9 cents a share, on a GAAP basis, on sales of $851.3 million. On a pro forma basis, which excludes charges, the company would have earned $400,000, or break even per share.

While the company's financial performance has truly improved, Amazon has benefited from some changes in recent years that cloud its overall performance.

In the last two quarters, for instance, the decline of the dollar vs. other major currencies has added about $110 million to Amazon's top line.

Amazon's Web sites that serve France, Japan, the U.K. and other countries sell items in local currency terms. Because those currencies are worth more in dollar terms than they were a year ago, the growth in Amazon's overseas sales revenue in dollar terms has outpaced its growth in local currencies.

Meanwhile, the company seems also to have benefited from a free-shipping promotion.

Last year, the company put in place a free-shipping program on most orders over $99. The company later lowered the free-shipping threshold to $25.

While this program has coincided with the company's sales resurgence, it's clearly been costly for Amazon. Although the company's overall sales rose year over year in the second quarter, its revenue from shipping declined from $81 million to $80 million. And while the company earned $2 million from its shipping operations in the second quarter last year, it lost $26 million on shipping this year.

Peter Eavis, a columnist for

TheStreet.com's RealMoney

, has

projected that Amazon will lose $70 million on shipping next year. That sum includes any revenue benefit the company might see from new customers drawn to the site by the offer.

The shipping losses are an important issue for Amazon, because the company is still struggling to show that it can be a profitable enterprise.

The company has never posted a full-year GAAP profit. In fact, the e-tailer has never posted a GAAP profit outside of its outsized fourth quarter. And having fourth-quarter profits is not a big hurdle for most retailers, because they tend to get the lion's share of their sales during the holiday season.

Despite the losses, Amazon has met Wall Street's expectations and is likely to continue doing so, said Gary Farber, a partner with hedge fund Nightingale & Farber. The stock might trade down if the market turns, but not because of its performance, said Farber, who has no position in Amazon.

The company has the potential to be the next

Wal-Mart

(WMT) - Get Report

, especially as it adds new products and sells to new locations, he said. But it's hard to tell how much money the company will ever make, he said.

"As a stock I think it's a joke, but how do you put valuation on it?" Farber said.

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