Famous short-seller David Einhorn attacked Amazon.com (NASDAQ: AMZN) in a presentation recently. The company’s business model will not lead to consistent profits, he said. Therefore, the stock is overvalued. It is not hard to figure out Einhorn’s real reason for skepticism. He believes Amazon shares are a short seller’s dream — and, therefore, his dream.
Einhorn’s reasons for beating up on Amazon’s stock are not compelling. Wall St. does not need to look beyond the recent results of JCPenney (NYSE: JCP) and other mid-tier retailers, or even big-box retailer Walmart (NYSE: WMT). Online shoppers have found Amazon irresistible. It has run several competitors, particularly Barnes & Noble (NYSE: BKS), almost out of business.
A victory over competition is not necessarily an outright win. Amazon has to show consumer loyalty and profits to make a final convincing case. The well-regarded Foresee study of e-commerce user customer satisfaction had Amazon on top again. It was even ahead of Apple’s (NASDAQ: AAPL) e-commerce customer satisfaction, and was it far ahead of e-commerce satisfaction for all bricks-and-mortar retailers. The survey was based on a large sample of 21,000 respondents, too.
The other criticism of Amazon concerns its margins. Despite a 34% increase in Amazon’s revenue last quarter to $13.2 billion, net income fell 35% to a tiny $130 million. There are at least two ways to look at the net income figure. One is that Amazon cannot control its costs despite rapid sales growth. The other is that the company has elected to forgo higher margins for now because there is a cost to crush competition. The value of Amazon’s stock indicates a majority of investors believe that the second case is true.
The debate about Amazon’s future reemerges with each new earnings report and product introduction. Despite these questions, Amazon has overcome the rule that sales growth slows as companies get larger. Only a few other companies that have been public for a long time have also been able to demonstrate this. Apple is the first one that comes to mind.
Amazon, despite Einhorn’s protests, has shown almost nothing to shake the opinion that nearly every major decision made by its management has made has been right.
Douglas A. McIntyre