Amazon Way Overpriced

Shares of ($AMZN) got body slammed yesterday for a 12.7% loss after the company reported terrible earnings. For the third quarter, Amazon earned just 14 cents per share which was 10 cents below Wall Street’s forecast. For comparison, Amazon netted 51 cents per share in the same quarter one year ago.

I think this is just the beginning of Amazon’s sell-off. Even after the big drop, the stock is very richly priced. Three months ago, Wall Street thought Amazon could earn $2.40 per share for this year. Now they’ll be lucky if they can earn $1.80 per share. Similarly, Wall Street had been expecting the company to earn $3.80 per share next year. I think those estimates will soon be pared back to less than $3 per share.

The stock closed yesterday at $198.40 which is down from the high of $246.71 from just two weeks ago. Amazon is currently going for 62 times forward earnings, which is an elevated multiple for an estimate that’s plunging.

My advice is to steer clear of

Here’s a chart of Amazon’s stock (in blue, left scale) and its earnings-per-share (black line, right scale). The two lines are scaled at a ratio of 50-to-1 which means that the P/E Ratio is exactly 50 when the lines cross. The red line represents Wall Street’s forecast.

Posted by on October 27th, 2011 at 6:20 am

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