Is Amazon a screaming buy?
Amazon (AMZN) has been on a run lately, with its stock up 75 percent in 2009. The Sunday New York Times examined the amazing continued success of the Internet retail giant, arguing that Amazon is trying to become the Walmart (WMT) of the Web. While Amazon still accounts for a fraction of retail sales overall, its growth rate is far higher than that of Walmart, which is always a good sign for investors.
It looks like Amazon may have much to teach Walmart about a non-Web part of retailing -- order fulfillment and logistics. One juicy detail from the Times piece: Amazon gets paid by customers 65 days before it must pay suppliers thanks to the pinpoint accuracy of its sales forecasts. This gives Amazon extra cash flow that it's been using to pay down debt -- from $2 billion in 2000 to $109 million in mid-2009.
And Amazon has implemented some original practices when it comes to picking the items that customers order out of its warehouses. You'd think it would make sense to store similar items next to each other but Amazon found out that if you do that, the odds increase that warehouse workers will pick the wrong item.
To avoid that negative result, Amazon stores 54-inch plasma HDTVs next to crates of Pampers. Moreover, Amazon gives a bar code to every product, shelving unit, forklift, roller cart and employee badge in these shipping centers. It uses software that tells employees where and which palette in the warehouse to go to next, sending commands to employees' wireless bar code readers by calculating the most efficient path from shelf to the shipping area.
Does all this earn Amazon a Price/Earnings ratio of 59 compared to Walmart's 15? Despite its advanced technology and exciting media coverage, e-commerce remains small -- it only accounts for seven percent of total retail sales, a figure that could grow to 15 percent by 2019. But Amazon grows over three times faster than Walmart -- its $20.5 billion in revenues grew at a 29.5 percent five-year compound annual rate, compared to the 9.4 percent rate at which Walmart grew its $403 billion in revenues.
On the basis of Price/Earnings to Growth (PEG) ratio, Amazon looks a bit pricey compared to Walmart. Amazon's PEG of 2 is more than Walmart's PEG of 1.8 (less than 1 is cheap). Amazon's PEG ratio is derived from its Price/Earnings ratio of 59 and its 29 percent earnings growth to $2.18 in 2010; Walmart has a Price/Earnings ratio of 59 and 29 percent earnings growth to $2.18 in 2010.
At these prices, neither company is a screaming buy. I think Amazon would need to double its growth rate to make the stock cheap. Its push into selling more general merchandise could boost its growth but it remains to be seen whether that be sufficient to cut its PEG below 1.
Of course, a market correction could come along and cut Amazon's stock price in half to $45. If it could maintain its current growth path, that would make Amazon a screaming buy.