Wednesday, January 30, 2008

Brace for some Rapids: Amazon's Earnings Thoughts

This earning season, we have already seen the humbling of technology prodigies Apple (AAPL) and VMWare (VMW). Even Intel, the blue-chip giant, plummeted 15% after good earnings.

I think that history will repeat itself when (AMZN) releases results after the bell today.

Yes, Amazon reported the best Christmas quarter ever. Yes, with eBay changing fee structure, some big (million-dollar) salespeople may be moving accounts to Amazon. Yes, they are expanding internationally.

So what's wrong with being long Amazon now?


One benefit (at least to value-oriented investors like myself) of the recent market retraction has been a restoration of rationality. We have seen Apple's forward P/E drop from 40 to a reasonable 25. VMWare, which went into its earnings with a forward P/E of 70, was quickly humbled and delivered a 30% decline from sobered investors.

Amazon is going into its call with a forward P/E of 45. Amazon is becoming a blue-chip, mature company; no longer can it be driven by speculation. I don't believe that it'll drop 50% after earnings to join Google and Apple at a 25 forward P/E, but when a company is looking to make $1.50 next year, the shares shouldn't be sold for $75.

Analysts and investors will look at this quarter's profits and margins, and price movement may indeed be determined by that. But if Amazon fails to pump up next year's numbers, look for a healthy revaluation a la Apple, VMW, and other former high-flyers.

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