Amazon Gets Downgraded (AMZN)

Amazon trades pretty much in the middle of its three year range. The stock hit $60 in mid-2003. It sits around $40 now.

Pacific Crest securities says that it is time to dump AMZN. Even with good revenue and margin growth over the next four years, the current valuation is too high, according to the research firm.

They could be wrong. Amazon really does not have any direct competition. Some online sites compete with its book franchise. Some compete with it in consumer electronics and its new video download service. But, it is still the internet’s shopping mall. Additionally, Jeff Bezos, the founder and CEO, appears to come up with new opportunities every few months. He is not selling Amazon’s excess storage and computing capacity. The mark-up on the business of selling something that is not being used must be pretty high.

But, there is a more fundamental arguement about Amazon’s value, When the stock was $60, revenue was $5.3 billion a year and operating income was $270 million. Over the trailing twelve months, revenue is now running $9.7 billion and operating income about $357 million.

Operating margins are down some, but, if that trend gets better, the stock may be cheap.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.