NEW YORK (TheStreet) -- You've got to hand it to Amazon.com (AMZN), a groundbreaking company that has made the transition from Internet bookseller to one-stop online retailer. Along the way, investors have been rewarded handsomely, with shares up 10-fold since 2007. Those who bought shares in 1997 and have held on have made 250 times their original investment.
This has also been a great success story for consumers. They can purchase darn near anything they desire via the company's Web site at extremely competitive prices, and from the comfort of their home. A few days later, their purchases are delivered to their doorstep. Amazon is a time saver and a convenience. Need a book? Amazon offers instant delivery to its own e-reader, the Kindle, or to other tablets. No more books to store or trips to the bookstore -- the few that remain, that is.
Earlier this week, Amazon startled investors with its plan to use personal drones to deliver products to customers. I thought it was a joke at first, but evidently it's not. I'll believe it when I see it, given the tremendous hurdles of such an initiative. Still, 20 years ago it would probably have seemed just as strange that you could do all of your shopping online or store your entire library on a 5- by 7-inch hunk of plastic.
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In my view, this is a case of "like the company, don't like the stock." Despite all of Amazon's innovation and all of the market share it has taken from the brick and mortar stores, its valuations are out of whack.
Amazon, which boasts a $175 billion market cap, may be a fast grower in terms of revenue, but where are the earnings? Last year, revenue grew an impressive 27%, to $61 billion, but the company lost $39 million, and generated just 87 cents per share in free cash flow. Revenue has continued to rise in 2013 -- last quarter it jumped nearly 24% -- but the company lost 9 cents per share, which met expectations.
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The question is whether Amazon can ever be anything more than a low-margin business. Between 2007 and 2010, the company's net profit margin averaged about 3.4%. That fell to 1.3% in 2011, and was in negative territory last year. Consensus estimates for 2014 are calling for earnings of $2.68 per share, which puts the forward price-to-earnings ratio at 143. For 2015, the consensus is calling for $5.39, which implies a forward P/E of more than 70. If those estimates are accurate, that's a heavy price indeed.