Get Real: Has the Amazon Bubble Finally Burst?

Matthew Lloyd/Getty Images

Matthew Lloyd/Getty Images

Amazon.com Inc. (NASDAQ:AMZN) needs no introduction. Nearly everyone with access to the Internet has visited its website, if not purchased something from its marketplace. I will get right to the point in this article. I want to address the 5,000 pound pink elephant in the room type question on everyone’s mind: has the Amazon bubble finally burst?

Come on — at over 500 times earnings, Amazon has been priced for perfection. But we have heard this before, time and again, quarter after quarter. This time may be different. It started off like any other quarterly report would. We learned that operating cash-flow increased 18 percent to $5.33 billion for the trailing twelve months, compared with $4.53 billion for the trailing twelve months ended June 30, 2013. Free cash-flow increased to $1.04 billion for the trailing twelve months, compared with $265 million last year.

The good news continued. We learned that net sales increased 23 percent to $19.34 billion in the second-quarter, compared with $15.70 billion in second-quarter 2013. As expected, Amazon lost money – again. Operating loss was $15 million in the second-quarter, compared with operating income of $79 million in second-quarter 2013. Overall, net loss was $126 million in the quarter, or $0.27 per diluted share, compared with net loss of $7 million, or $0.02 per diluted share, in second-quarter 2013. Jeff Bezos, founder and CEO of Amazon.com, stated:

“We continue working hard on making the Amazon customer experience better and better. We’ve recently introduced Sunday delivery coverage to 25 percent of the U.S. population, launched European cross-border Two-Day Delivery for Prime, launched Prime Music with over one million songs, created three original kids TV series, added world-class parental controls to Fire TV with FreeTime, and launched Kindle Unlimited, an eBook subscription service. For our AWS customers we launched Amazon Zocalo, T2 instances, an SSD-backed EBS volume, Amazon Cognito, Amazon Mobile Analytics, and the AWS Mobile SDK, and we substantially reduced prices. And today, customers all over the U.S. will begin receiving their new Fire phones including Firefly, Dynamic Perspective, and one full year of Prime we can’t wait to get them in customers’ hands.”

So what is the problem? The quarter was not in any way egregiously bad. It was not particularly strong either. No — the pin which may have just burst Amazon’s bubble was an outlook that was not just a surprise, it was a shock to investors, shareholders, and analysts alike, myself included. If you have not heard, I will start with the good news first, breaking the tradition of always bad news before good news. In the coming quarter, net sales are expected to be between $19.7 billion and $21.5 billion, or to grow between 15 percent and 26 percent compared with third quarter-2013. However, operating loss is expected to be between $810 million and $410 million, compared to $25 million in third-quarter 2013. Yes, there are zeros there. Amazon said it could lose just under a billion dollars.

The expectations for this company have been utterly high. But this is enough to crush even the most ardent believers’ dreams — and wallets. My sentiment is to sell before the bubble truly bursts. If it merely deflates, you can always buy back in. Nobody ever go hurt taking a profit.

Disclosure: Christopher F. Davis holds no position in Amazon and has no plans to initiate a position in the next 72 hours. He has asell rating on the stock and a $255price target.

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