Despite Attack, Amazon’s Appeal Lingers

By Douglas A. McIntyre Published May 17, 6:24AM EDT

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Famous short-seller David Einhorn attacked Amazon.com (NASDAQ: AMZN) in a presentation recently. The company’s business model will not lead to consistent profits, he said. Therefore, the stock is overvalued. It is not hard to figure out Einhorn’s real reason for skepticism. He believes Amazon shares are a short seller’s dream — and, therefore, his dream.

Einhorn’s reasons for beating up on Amazon’s stock are not compelling. Wall St. does not need to look beyond the recent results of JCPenney (NYSE: JCP) and other mid-tier retailers, or even big-box retailer Walmart (NYSE: WMT). Online shoppers have found Amazon irresistible. It has run several competitors, particularly Barnes & Noble (NYSE: BKS), almost out of business.

A victory over competition is not necessarily an outright win. Amazon has to show consumer loyalty and profits to make a final convincing case. The well-regarded Foresee study of e-commerce user customer satisfaction had Amazon on top again. It was even ahead of Apple’s (NASDAQ: AAPL) e-commerce customer satisfaction, and was it far ahead of e-commerce satisfaction for all bricks-and-mortar retailers. The survey was based on a large sample of 21,000 respondents, too.

The other criticism of Amazon concerns its margins. Despite a 34% increase in Amazon’s revenue last quarter to $13.2 billion, net income fell 35% to a tiny $130 million. There are at least two ways to look at the net income figure. One is that Amazon cannot control its costs despite rapid sales growth. The other is that the company has elected to forgo higher margins for now because there is a cost to crush competition. The value of Amazon’s stock indicates a majority of investors believe that the second case is true.

The debate about Amazon’s future reemerges with each new earnings report and product introduction. Despite these questions, Amazon has overcome the rule that sales growth slows as companies get larger. Only a few other companies that have been public for a long time have also been able to demonstrate this. Apple is the first one that comes to mind.

Amazon, despite Einhorn’s protests, has shown almost nothing to shake the opinion that nearly every major decision made by its management has made has been right.

Douglas A. McIntyre

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.