Wednesday

Amazon

Amazon versus Apple versus Google

Amazon hit all time high two nights ago at $242, with a current PE of 109. If you go to Yahoos Market Pulse which tracks the live chat on Amazon by traders (tweets etc), you will find everyone is bullish on Amazon’s soon to be launched “Ipad Killer”. We are short Amazon to the neck - and at prices way below the current level (averaged up to $205 at the moment). We need to remind ourselves that MANIA can go on longer than we can remain solvent - just look at the craziness of Netflix prior to the recent crash (yes it almost halved in few weeks - we tried to short Netflix many times but our broker refused our orders due to “borrowing restrictions”). So, whats with Amazon’s triple digit PE - huge growth?

Amazons REVENUE is up 51% for the last quarter compared to 2010. So even if its NET PROFIT is up by 51%, its forward PE will be 72.6. And if it continues to grow at the astronomical 51% rate its following year PE will be 48.4, and the following years PE at 51% profit growth is 32.2 . Yes, still bloody expensive even after year on year 51% growth for 3 consecutive years (considering Apples PE of 16). The problem (and reason why we are so bearish) is, its net profit is DOWN whilst revenue is up 51%. So Amazon is selling stuff at a loss. My only thought it, its a deliberate attempt to win market share and the increase operating costs are one offs.

Here is Amazons latest financials:

Operating expense: cost of sales went up proportionately at 51%. “Fulfillment”  is up 61%, “Marketing” is up 61%, “Technology and Content” is up 71%, Administrative is up 47%. So Fullfillment, marketing and technology and content costs is rising higher than revenue, hence operating income is down. Unless these are once off increases that will contribute to lower operating costs in the future (generally that should be the case with online retailers), the triple digit PE on Amazon is not justified.

Lets look at Apple’s financial results - it is a solid business.

Net income is up 124% with revenue up  82%. That is a solid business where additional growth in revenue goes straight to the bottom line! Despite its phenomenal growth, it is only trading at a PE of 16.

If Apple were to trade at Amazon’s PE, it would be about $2400 (not $411) - or if Amazon were to trade at Apples PE, it would be trading at about $36 (not $240).

Out of interest, lets bring in Google’s financial statement:

Revenue growth of 32.3% year on year for the last quarter, net income up 36%. Again, income is up more than revenue. Google’s revenue is good quality revenue adding to the bottom line. It’s PE??? 19. Pathetic when you compare it to Amazon’s PE of 109.

One could argue that it is harder for a bigger business to grow at double digit growth compared to smaller cap businesses. We accept that, but Amazon’s market cap is catching up to Google (Apple’s market cap = 383B ; Amazon = 106B and Google = 176B). Fundamentally, we see nothing special with Amazon’s intellectual property and technology compared to Google. Its Kindle readers are akin to Blackberry phones compared to iPhones. The beauty of the business is the hardware integration with its online retail store. Barrier to entry for online retailing is definitely not as high as barrier to entry to the Search Engine business. So why the extreme optimism with Amazon compared Google or Apple? I have no idea.

One final point. Here is Amazons forecast for the next quarter (not sure if anyone has read it):

YES, the pathetic margins are ongoing into the next quarter. Revenue expected to grow 36-46% whilst income expected to DECLINE between 36-93% (!). OK, bulls would argue that this strategy of sacrificing margins should not be measured quarter to quarter - its a long term investment. Maybe they are right.

Conclusion: Our trade from last night- short Amazon 200 shares at $240; long 88 shares of Google $545. We will continue to build up on this position as it goes against us.