The stock of Amazon.com Inc. (NASDAQ:AMZN) is sharply higher in overnight trading. The company reported doubling of profits in first quarter of this year to $1.6bn and is expected to open with a sizeable gap between 5% and 10%.
In our opinion AMZN is highly overvalued with a P/E ratio (TTM) of about 246 based on data before the earnings announcement. Note that the bulk of the profits for the quarter, or about $1.4bn, did not come from retail sales but from an increase in sales of Amazon Web Services (AWS) that provides hosting to companies like Neflix but also to the CIA. The increase in AWS sales was 49% for the first quarter.
Below is a daily chart of AMZN since inception with the growth of $1 and a drawdown profile:
The problem with extraordinary quarterly performance is that it is unlikely to repeat. Therefore, we believe that a top in this stock will be formed soon. This stock is a remnant of the dot com bubble, one could call it a statistical survivor. Fundamentally it has no advantages over other companies that compete in retail sales and hosting services but it seems that it has done it a lot better up to now. However, this pattern is not sustainable in our opinion and at some point there will be reversion to the mean.
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