We were impressed with the fact that Amazon.com (AMZN) was able to overcome its early history as an overrated, overpriced dot-com and transform itself into the world’s leading internet retailer. Amazon generated its first profit in 2003 and has seen rapid revenue growth in the last 10 years (from $3.9B in 2002 to $48B in 2011). Amazon’s operating income hasn’t seen the impressive level of growth as its revenues though. While Amazon saw its operating income more than quadruple from 2002 ($64M) to 2003 ($271M) and while it increased from $271M in 2003 to $1.4B in 2010, this was at a slower pace than its revenue growth from 2003 ($5.3B) to 2010 ($34B). Unfortunately, Amazon seems to be regaining its reputation as an overrated, overvalued dot-com chasing sales growth as the expense of profitability.

The real concern is that after Amazon released its FY 2010 results, it announced that Q1 2011 operating income was going to be significantly lower than Q1 2010’s results even though AMZN was expecting a 35%-40% revenue increase year-over-year. AMZN’s FY 2011 operating income ended up 39% lower than FY 2010 even though revenue grew by 40.6% in 2011 versus 2010. We are seeing the same phenomenon in YTD 2012, as the company’s revenue grew by 31.6% year-over-year yet its operating income dropped by 43%. Even if Amazon meets the $2.30 consensus analyst expectations for FY 2013, it is still trading at almost 105X estimated 2013 EPS. But the real surprise is that although this 2013 estimate of $2.30/share is 9% less than what was achieved in 2010, the company’s stock has increased by 45% since it bottomed out in January 2011 after reporting its expectations of lower operating income.

By any standard measure, Amazon is overvalued. Amazon’s PE based on expected 2012 EPS exceeds 300 and we already established that it is trading at over 100X expected 2013 EPS. Amazon enjoyed 24% EPS Growth in 2010 versus 2009 levels and even if Amazon had replicated that feat in 2011 and 2012, 2012 EPS would only be $3.89 and Amazon’s stock would still be at a rich PE of over 60X.

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