It is impossible to argue against the success of Amazon.com Inc. (NASDAQ: AMZN) as a company, and it is also impossible to say that the stock is not on fire.  After all, 52-week highs AND all-time highs are the greatest measurement a stock can get.  The problem here is that this last run has so many investors excited that the metrics for valuing Amazon are starting to resemble the great tech bubble all over again, at least for a time of “the new normal.”  And Wednesday night’s tout from Jim Cramer on CNBC’s “Mad Money” said Amazon has another 74 points of upside.

The problem is that if you take the math used to get there, consider where this stock has been, consider the outside forces, and add in just a few small risk factors, this figure gets more than difficult to justify in almost any scenario short of a 2010 stock market that can repeat the gains seen in 2009.

What is important to consider here is that Amazon is already up almost 250% over the last year. Cramer noted Amazon’s huge move from 1998 to 1999 when the stock gained over 1,400%.  Using accelerated growth rates and a double to earnings growth above 30% comes to 60-times earnings as a realistic figure.  Cramer said that the expectation is 25% earnings growth, but the Cyber Monday data may allow over 30% growth.  The $3.00 estimate for next year may be too low and Cramer used a figure of $3.60 EPS because of its recent solid strength and its ability to beat estimates.

Cramer calls the Amazon.com move “logical an even probable.”  Amazon’s estimates may be 20% too low according to Cramer.  And Cramer’s figure at 60-times $3.60 generates a price target of $216.00 versus a price of $142.25 at yesterday’s close.  In short, this is a call for yet another 50% upside on top of 50% gains since the day before the October earnings a mere month and a half ago.

Wall Street analysts are often late to the party, and that has been the case if this scenario comes anywhere close to panning out.  The high target seen so far from analysts on Amazon is $163.00, but an average target is under today’s current prices at about $130.00.  So Cramer is trying to become the top tick in Amazon.

There is an issue to consider here that is above and beyond this holiday season excitement.  Amazon.com is effectively now entering into what many feel is nothing short of a price war with Wal-Mart Stores Inc. (NYSE: WMT).  What happens during price wars?  Margin compression.  And Wal-Mart has no qualms about price wars, and the company has serious performance anxiety when it comes to its online sales efforts.  It has even decided to go as far as to allow some other vendors to have a presence in the Wal-Mart arena on the web.  2010 is still an unknown for many Americans and the stock market’s major rally  has definitely priced in more than just a muted recovery.  And what about Best Buy (NYSE: BBY) as a competitor in electronics and gadgets sales?  The company has done well in keeping its inventories low and it can’t afford to let either Wal-Mart or Amazon get too ridiculously far ahead in the online sales arena.  We won’t bother mentioning the book stores, because they have done an awful job of competing against Amazon on the print and now on the digital side of books.

There is another issue to consider that comes up almost every year in at least some states.  Sales Tax.  States are so out of kilter with their financial budgets that they are coming up with more and more ways to extract money from companies.  Amazon.com has done its best efforts, and rather successfully, at avoiding a ‘nexus presence’ in states where merely having a presence can open a company up to all sorts of taxation.  But this is a permanent issue that will always be a risk for the company.

Amazon.com will probably also keep acquiring companies.  It has masterfully done this and we see no reason that the company will cease making strategic purchases where it can.  But one integration miss could cost Amazon if it makes too large of an acquisition.  The company’s market cap today is over $61.5 billion.

If the bull market continues to ramp, well anything is possible in price targets.  The short interest is actually down in Amazon.com now at more than 19.5 million shares, not even 3-days worth of volume.  And traders are using short-dated stock options to get exposure without taking the price risk in the stock as you will see just in the DEC-2009 CALLS that expire in just two weeks:
CALL$    Volume    OpInt
$135    9,271    12,206
$140    11,221    6,490
$150    5,981    9,121

Now that we are in the second half of calendar Q4, we also look to forward year earnings estimates.  Thomson Reuters estimates for this year are $1.88, and you know that investors are now using at least $2.00.  That gives a current year earnings multiple of 71-times earnings at the ramped up figure.  The Thomson Reuters figure we saw for 2010 is actually $2.53 EPS, and that earnings estimate has risen by 20% since just the October earnings report at a time that the stock has run 50% since the October earnings report.

Anyhow, you get where this is going.  The growth investors can justify these high ramp-up figures until the end of time, particularly if there is a belief that the stock market gains of 2009 will be repeated in 2010.  If we just use straight-lime math for the current estimate, Amazon.com is at 57-times 2010 earnings, or 47-times the Cramer $3.00 figure using today’s closing price.

But every other investor out there besides the high growth and momentum investor is going to start having a very hard time stomaching the valuations.  Even using a multiple of 50-times 2010 earnings gets to $150.00 using the higher base-case from Cramer.  One hiccup can cause serious pain.  And if the bears can ever get some traction more than a 3% market pullback or one slowing of the recovery in 2010, then suddenly even those “growth at any price” investors are going to have to get very creative using such high forward multiples compared to the market.

JON C. OGG

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