Amazon’s Value Disconnect

If you have some shares of Amazon.com (AMZN) I can’t help but suggest you at least consider selling some up here at $46 per share. The stock is up 20% since the company’s solid second quarter earnings report.

Now I know Amazon was supposed to be a superior retailing operation because of its online model, but if you compare it to Barnes and Noble (BKS), they’re pretty similar. It’s true that BKS isn’t going to grow 15% annually long-term, but a 2006 P/E of 48x for Amazon seems too rich to me. After all, that’s 3 times its expected growth rate!

As for the thesis of higher profit margins associated with a lack of bricks and mortar stores, Amazon’s 2004 operating margins of 6% barely nudge out Barnes and Noble’s 5% margin. Turns out that gigantic warehouses across the country cost about the same as actual storefronts.

For those who feel Google (GOOG) shares are expensive at 40x next year’s profits, Amazon stock must look even more overvalued, given it trades at 48x forward earnings and is expected to grow its business 18% next year, versus 45% for Google.

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