The aim of this thread is to spot stocks that may be overvalued. A brief (or not) discussion of why we consider these stocks overvalued (or not) will follow.
In another thread, Apple has already been mentioned. So I will start with Amazon. In the latest earnings announcement, Amazon beat sales estimate for the quarter, as sales rose 34% year over year by 24%. As Sehrish mentioned in another thread, stocks go up (in the short term I might add) when they beat expectations and vice versa. So right on cue, the stock price surged 16% on Friday (WSJ Sat 28).
Amazon’soperating margins were razor thin at 1.5%, and its net income for the quarter, of 0.19 billion $, was what Apple earned in a day last quarter! To put this in context, Amazon’s market cap of 103 billion $ is more than 1/5th of Apple market cap.
Amazon’s P/E ratio is a staggering 163! For strange reasons, its free cash flow is greater than its net income. (its depreciationwas 1 billion dollars, which is added to net income, and there was another 0.72 billion added to net income as some sort of “adjustment”). So its price to free cash flow based on 2012 estimated FCF is expected to be 56, stil very pricey.
Its profit margin peaked in 2009 at 4.6%, and is expecetd to be 0.7% this year. So if it is able to get its margin up, then the P/E could come down from current nosebleed levels. But here are some headwinds that could make it difficult.
Headwinds:
1) Capex for this yeais expected to rise to $2 billion as it builds distribution and data centers. So FCF expected to take a hit. So say bye=bye for short term for P/FCF to decreases from 2012 expected level of 56.
2) Amazon has struck deals with 12 states (with 40% of US population) to pay sales tax. So there goes its advantage over brick and mortar stores. It is unclear how much impact this would have on its bottom line, but at the least, it cannot support the ridiculously high P/E and P/FCF.
well.. i don't follow closely but didn't amazon's margins decline mostly coz of the discount they take for their kindle fires? it is a move that could potentially pay of with customer loyalty and long term revenues. it is hard to believe their margins have been that narrow all along. i could be wrong though..
Per the article, their margins declined from 4.6% to current ~ 1.2 percent (possibly due to kindle fire discount etc) , and are expected to bottom at 0.7%. Margin expansion to the peak of 4.6% should bring P/E back to say 42 if sales stay flat. And if sales grows 10% per year over next 3 years, P/E could decreased to ~ 30 in 3 years. That assumes everything goes perfectly.
Granted the 163 P/E may not remain that high for long as they expand margins. But for P/E to get to say 16, it would take a lot of things to go right.
Also, note the margins discussed are operating margins, not gross margins. That is, operating profit/revenue (at least that is what I think is meant by operating margins).
I personally do not short any stock - too much risk. If I consider anything overvalued, I just stay away. Also, I am careful not to gove buy or sell opinions.
Anyway, care to provide some reasonsn why you are so confident about your buy recommendation.
Note to everyone - never take the recommendation of anyone - do your own homework.
^Economy is on recovery track. All macroeconomic indicators are showing progress. Any bad news from europe is already priced in the market plus everyone expects (and rightly so based on past 3 years experience) Fed to bailout the economy in case of any issue so double dip recession or a slowdown is out of question.
^Economy is on recovery track. All macroeconomic indicators are showing progress. Any bad news from europe is already priced in the market plus everyone expects (and rightly so based on past 3 years experience) Fed to bailout the economy in case of any issue so double dip recession or a slowdown is out of question.
Very difficult to time market based on macro economic factor.. since your post market down 4. Pct. You did not provide time frame over which you are bullish
Anyway thread was ant amazob Beijing overvalued.
IMO these mega caps are overvalued. Typically when headwinds are expected large small caps all sell off. I humbly suggest waiting for major pullback. Caps being consumer discretionary one can afford to wait.
