Buy, Sell or Hold: The Smart Money is Selling

I love the super deals that I get from (NASDAQ: AMZN). They always seem to beat the brick-and-mortar stores and I get two day-delivery for free.

It's no wonder to me that the online retail giant has ranked at the top of Foresee's E-Retailer Consumer Satisfaction index for eight straight years.

What I do have doubts about is Amazon's share price. It continues to make new highs while the company's core business is slowing and its new "growth" businesses aren't all they are cracked up to be.

With a P/E that has now reached astronomical levels, here's why the only money I'll be giving to Amazon will be what I spend on its merchandise.

The Rough Road Ahead For

When it reports its Q4 earnings after the close today, Amazon is expected to earn over $62 billion in revenue for 2012. In doing so, it has left a wasteland of extinct or near-extinct companies in its wake.

I'm talking about Radio Shack, Circuit City, Blockbuster, Borders Books, and Barnes & Noble, to name just a few.

But now that Amazon has thinned out the niche crowd, it will be going up against the most dominant players in retail, the ones that actually produce profits-players like Wal-Mart, Target and Costco.

Of course, the bulls will argue Amazon has plenty of room to grow, considering its total annual revenue is only about 12% of Wal-Mart's $500 billion in annual sales. But those who follow this line of reasoning also believe that the competitive advantages Amazon has held for years will continue in the future.

In fact, these competitive advantages are slowly disappearing.

In the past, Amazon has been able to sell its products with no state sales taxes charged to its customers. This advantage is shifting as new laws in Pennsylvania, Texas and California are now requiring Amazon to start collecting sales tax. This trend is very likely to continue as more cash-strapped states are looking for revenue wherever they can find it.

It is true that by being strictly an online retailer Amazon does not carry the added expense of having multiple locations fully staffed and with an abundance of inventory. However, it does have to absorb the cost of maintaining and staffing large warehouses loaded with inventory so Amazon can package and ship its offerings to many corners of the world within days.

How much does Amazon charge for this service? It's practically free.

With energy costs likely to go up in the future, I doubt FedEx, UPS or the bankrupt USPS are prepared to subsidize Amazon's low-cost delivery if crude oil pushed to new highs. The company's shipping charges will likely have to go up. What will Amazon's already razor-thin margins look like then?

Also, when Amazon first started, it had a distinct first-mover advantage - but now brick-and-mortar competitors are in the online space, too. Is it possible for Amazon to lower prices enough to maintain market share as its brick-and-mortar competitors start to draw customers to their own online space operations?

Even if its competitors never go toe-to-toe with Amazon's online pricing, they still have a powerful tool - they can simply match or beat Amazon's online prices when customers visit the stores.

In fact, Target is already offering price-matching on any online product from its major rivals, including Amazon. Not only does the customer get the best price, but they also get the instant gratification of taking the item home with them.

If fighting off online competition from the best names in retail wasn't enough, Amazon is pitting its Kindle line of tablets and e-readers against Apple's extremely popular iPad.

Even though Amazon is practically giving the product away at no cost, Apple still has an estimated 10 times the market share with the iPad. And now Amazon faces additional headwinds from the new iPad Mini, which is priced very close to the Kindle Fire.

Amazon is also looking to China to fuel more growth, as the Asian giant's tablet PC market grew by 63% in Q3 from the previous year.

Unfortunately for Amazon, the Chinese market is still dominated by Apple's iPad, which holds about 70% market share. In addition, Amazon doesn't have a dominant online presence in China as it does in North America, weakening its strategy of directing sales to its website through its mobile devices.

Amazon's push into Chinese online sales will also face fierce competition from Tmall, which according to market research firm Euromonitor International, will overtake Amazon in sales to become the world's largest internet retailer by 2016.

Then there's cloud computing.

Amazon started its cloud business more than six years ago. Google launched its cloud computing business only a year ago. But Google is making a large splash with what many consider superior quality and price.

Amazon has posted very good growth in the cloud, with that business unit growing by 64% from a year ago. But to remain competitive, Amazon recently announced a 25% price cut for its cloud storage services in response to price cuts from Google.

In addition to Google, the company faces stiff competition from cloud heavyweights like IBM and Rackspace.

I'm not saying Amazon can't gain some traction with its Kindle, its cloud services or a strategic push into China - merely that all of these endeavors face huge headwinds and offer the company no first-mover advantage. Ultimately, Amazon's profitability rests squarely on the shoulder of its online retail sales, which account for 90% of the company's revenue. A P/E of 3,286+?!?

I wonder what famed value-investor Benjamin Graham would have to say about Amazon's astronomical P/E ratio of 3,286.38.

Yes, you read that right - 3,286.38 (as I write this).

My guess is that he'd laugh you out of the room for considering investing at that price - but the market doesn't seem to care. The stock is trading north of $270.00 a share, and it is now up approximately 45% from this same time a year ago.

Meanwhile, earnings have been falling fast. In fact, average analyst estimates call for FY2012 earnings to sink to a -$0.03 loss, down from $2.53 and $1.37 in FY/2010 and FY 2011, respectively.

Those numbers are going in the wrong direction in a big way - and they hardly instill enough confidence to justify a stock trading at more than 3,200x earnings.

After the close today the company is expected to post another year-over year-decline in quarterly earnings - a pattern that has now become common place for Amazon. Even though revenues have grown every year at a rate of between 20% and 30%, its net profit margins have always (except for 2004) ranged at a pitifully low 0% to 3%.

Currently the company's net profit margin is only 0.07%, which is considerably below Target and Wal-Mart, who currently boast margins of 4.20% and 3.57%, respectively.

The company's margins aren't likely to improve soon as it continues to spend billions of dollars in order to build out infrastructure to keep up with the competition and fund the other divisions that provide customers products and services at near cost. reminds me a lot of stocks from the dot-com era. The price activity appears to be driven more on the news feed, top-line hoopla, momentum and technical analysis rather than on its real fundamentals.

I would, therefore be a seller of

The market's "hot stock" enthusiasm may well prove me wrong, but I'd rather not take the risk.

Instead, I would focus on deploying my hard-earned capital into a company with solid fundamentals, a clear vision to the future - and a valuation that wouldn't get me kicked out of a Berkshire Hathaway pep rally.

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

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