Amazon’s valuation is just too high, this portfolio manager says

With Prime Day coming up on July 16 and its second quarter earnings report due July 26, we can expect the next few weeks to be busy ones for Amazon (NASDAQ:AMZN).

But while investors may have profited handily from the stock in recent years, value-based investors may want to stay clear of the e-commerce giant, says Christine Poole of GlobeInvest Capital Management, who argues that it’s doubtful whether the company can ever meet the high hopes captured in its valuation.

Amazon’s Prime Day arrives next week, the first for the company since acquiring grocery chain WholeFoods Market Inc. in a US$13.7 billion deal last year. Prime members who spend US$10 at one of the company’s US stores between July 11 through to the 36-hour Prime Day sales starting July 16 will receive a $10 Amazon credit towards Prime Day deals.

But the results of the company’s attempt at penetrating the (US) $800 billion grocery market are still uncertain, as is whether or not Amazon could ever be worth the sky-high valuation placed upon it. With an astounding market capitalization of US$843 billion, Amazon’s share price now stands at 70x its per-share future earnings estimate.

Those kinds of numbers can’t be ignored, Poole argues. “I’m a value-based manager, so it’s very difficult for me to justify the valuation for Amazon,” she told BNN Bloomberg. “Anybody who has owned the shares has done very well. There are a lot of high expectations and growth built into that stock, so that’s why you see Amazon get into new areas because they have to continue to grow.”

“It’s very much a momentum stock,” says Poole. “There are a lot of expectations and forecasts for future growth.”

Not everyone agrees with that sentiment, however, including the hundreds of fund managers who are banking on the company’s ability to stay ahead of the curve in e-commerce.

“Amazon wins by constantly changing behaviour through innovation,” said Jitendra Waral, senior analyst at Bloomberg Intelligence, to the Globe and Mail recently. “The company spends eight to ten years to research new products, so it always is thinking much ahead. Amazon’s end market is 16 per cent of global gross domestic product, excluding China. To put this in context, if Amazon’s end market was the Empire State Building, it still is on the third floor. This gap creates plenty of return-on-investment opportunities for their long-term investments.”

In April, Amazon reported its first quarter earnings, which featured revenue of US$51.0 billion and earnings per share of US$3.27, both of which beat the consensus estimates. The company’s revenue jumped 43 per cent year-over-year, in part due to the addition of WholeFoods, while its net income doubled to US$1.6 billion. Consensus estimates for Amazon’s Q2 include revenue of US$53.4 billion and an EPS of $2.50.

Disclosure: Cantech Letter’s Nick Waddell owns shares of Amazon.