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.
BGC forecasts a modest beat, by 2 cents, on the bottom line, but warns that further proof of slower profit growth may catalyze a correction in the stock. As mentioned above, Amazon is priced for perfection, despite evidence of a slowdown and potentially damaging economic reports, ranging from lower consumer confidence to higher gasoline prices, which suggest a cannibalization of consumer demand. BGC estimates sales losses in Japan, stemming from the earthquake and tsunami, of $100 million, with "the potential to triple in the June quarter." Expensive gas, in addition to crimping consumers' shopping, raises Amazon's shipping costs. BGC, convinced that Amazon is using Kindle as a loss-leader in order to lock in sales for its music and streaming-movie businesses, expects continued aggressive pricing as the company tries to grow its market share in the quickly digitizing movie and music business. Books, movies and music accounted for a disproportionate 40% of Amazon's sales in 2010 and as those products shift from physical to digital form, it may lose its edge in e-commerce. Like many Internet companies, Amazon faces stiff competition and no economic moat, or sustainable competitive advantage. It will be forced to compete with Apple, Google ( GOOG), Netflix ( NFLX) and the privately-held Facebook in online media sales, as pay-to-download and streaming become commonplace. The silver lining to BGC's bearish thesis is that Amazon is still growing at an attractive pace, has a clever management team and has prudently managed its balance sheet, carrying nearly $8.8 billion of cash and $865 million of long-term debt at the fourth-quarter's conclusion, for an ample quick ratio of 1 and a modest debt-to-equity ratio of 0.1. Still, Amazon's profit margins are paltry, with an operating spread that declined from 5.2% to 3.9% in the fourth quarter and a net margin at 3.2%. Amazon's other major competitor, which looms large as the world's most dominant retailer, is Wal-Mart ( WMT), which is rapidly expanding online. Interestingly, Amazon is more internationally diversified than Wal-Mart, in relative terms, with 45% of 2010 sales coming from overseas markets, compared to Wal-Mart's 26%. However, in absolute terms, Wal-Mart dominates with $109 billion of international sales in 2010, compared to Amazon's $15 billion. Make no mistake, Wal-Mart's global retail strategy is multi-channel. It intends to compete in domestic and international Internet markets. In summation, there's no shortage of Amazon competitors, presenting risk to its current equity premium.
BGC's Street-low price target, at $125, is still equivalent to a generous 38-times the researcher's 2011 earnings projection. Fiscal-year consensus has declined by 2 cents in the past four weeks as analysts revised down their 2011 estimates. Amazon is the 18th most-shorted Internet retail stock, with an unremarkable 2% of the float sold short. The stock has been a recent top performer around earnings as Amazon has beaten the consensus in five of the past six quarters. The company has an average earnings beat rate of 16% and its stock has an average absolute price change of 10%, reflecting abnormal volatility around reports.
-- Written by Jake Lynch in Boston.
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