CBSMarketwatch: Are Amazon.com's (AMZN) Shares Too Expensive?

It's starting to feel all 1999 again...once we begin to hear the most cited example of why stocks are cheap that we heard a decade ago i.e. well if Amazon.com (AMZN) is worth 65x earnings surely ABC is worth 50x, we know Ben Bernanke has bested his predecessor at equity bubble creation.

The problem with valuing Amazon is there is no real competitor - while still growing faster than its brick and mortar peers in retail (hence hard to compare to), it has very little in common (in my opinion) to Ebay (EBAY).  Everyone else online in retail is more of a niche play versus Amazon's broad portfolio.  As we said Friday - great, innovative company ... but at what cost?

Via CBSMarketwatch :

• Wall Street has long had concerns about Amazon.com Inc.'s market valuation, which has typically traded at a fat premium to other retail companies, and even above many of its pricier Internet peers.
• However, many brokers were still in support of the stock Friday as the shares surged more than 26% to set a new all-time high -- on a split-adjusted basis -- of $118.40. At least four brokers upgraded their ratings to buy following the company's strong third-quarter results, in which earnings jumped 69% on strong sales across all product lines.
• Even more analysts boosted their price targets on the stock -- lifting Wall Street's median price target for the shares from $100 to $125.
• "We recognize that the stock is far from cheap, but believe that it deserves to trade at a premium given its earnings growth, the possibility that earnings could further accelerate, and the fact that it's taking significant share," Dan Geiman of McAdams Wright Ragen wrote in a report.  Geiman upgraded the stock to a buy rating and raised his price target from $81 to $130 -- which is 53 times his estimated earnings for the company in 2010.
• Imran Khan of J.P. Morgan & Chase boosted his own price target from $108 to $150, which is currently the highest on Wall Street for Amazon. In a note to clients, he cited Amazon's strong gain in free cash flow -- which jumped 98% to $1.9 billion in the third quarter -- and his belief that the company will continue to take share of the growing e-commerce market.   "Given the rapid revenue growth and superior industry position, we believe the stock has capacity to see further multiple expansion," he wrote.  (I assume to 80x forward?)

• At its current levels, Amazon trades at 56 times estimated earnings for the next four quarters. Its closest rival -- online merchant eBay carries a price-to-earnings ratio of only 14.6, based on its current share price. 
• Traditional retail giants Wal-Mart Stores Inc. and Target Corp. also trade with P/E ratios in the 13-15 range. 
• Amazon's valuation is well above that of even big Internet players. Google Inc. (GOOG) which reported nearly $6 billion in revenue for the third quarter and generated more than $2.5 billion in free cash flow, trades at only 22 times estimated earnings -- despite a stock price above $550. 
• While Amazon is often compared to other retailers, the company also has a growing business in digital media, selling music, movies and video games for download. In addition, the company says its Kindle e-book reader is now the most popular product on its site, for which it sells electronic versions of books, newspapers and magazines.

• Colin Gillis of Brigantine Advisors is one of the few analysts who is bearish on the stock. He lifted his price target to $90 from $83 but kept his sell rating, noting worries about competition.  "As a discounter, Amazon is pressured to provide low prices -- hurting its ability to deliver margin expansion," Gillis wrote. "We note that the Wal-mart CEO recently commented 'If there is going to be a 'Wal-Mart of the Web' it is going to be walmart.com.'"

No position