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Amazon.com: Name Your Price at $7.50?

When Texas was fighting for independence in the 1800s, the most memorable battle was at the Alamo. The Texans were heroic. But it was enough and after 13 days, the troops were decimated. But, of course, the Texans ultimately prevailed and the army commander Sam Houston declared, "Remember the Alamo!"

In a way, I think there could be a new phrase for Internet stocks: "Remember Priceline.com!" While I think Internet stocks are undervalued, I think they will probably continue to become more undervalued. Yes, markets can be brutal. Who would have thought it would be possible to see Priceline.com hit $5 per share?

The lesson of Priceline.com is that despite large revenues, big backers and a strong brand name, the stock price can be severely punished. Actually, I think the Internet markets are undergoing a purge, taking away premium valuations. In other words, I think the Internet leaders look particularly vulnerable.

Already, Yahoo! has come under immense pressure. And, I think, there is further downside.

But I also think Amazon.com is in jeopardy of value deflation. Let's take a look at some of the parallels.

Priceline.com has been criticized for having a business model that does not work. Well, in the case of Amazon.com, it is hard to make an argument that its business model can be profitable. Traditionally, retail businesses have low margins. Why won't this be the same ultimately for Amazon.com? Is being an online retailer enough to make this different? I don't think so. After all, it was interesting to see that Amazon.com teamed up with a brick-and-mortar retailer, Toys R Us, in order to penetrate the toy marketplace.

Another criticism of Priceline.com is that it is over-diversified. Simply put, it is too difficult for a young company to be everything to everybody. But Amazon.com suffers from the same problem. Already, Amazon.com sells a plethora of goods, such as beauty supplies, and even power tools. Of course, this has yet to produce any signs of profitability. In fact, Amazon.com placed investments in a variety of online companies to enter these markets. And, yes, these investments have seen huge value erosion.

But Jeff Bezos is not convinced that his diversification strategy is wrong. He recently affirmed this sentiment.

But to me, it looks like Bezos is out-of-touch with the current reality. We are not in the go-go days of Internet valuations. Rather, Internet companies need to be pragmatic. Actually, a troubling aspect for Amazon.com is that it floated junk bonds in order to finance its ambitions. As we saw 10 years ago when the LBO market imploded, debt can destroy companies.

Also, the economy is slowing and retail sales, as a result, are becoming problematic. Look at Home Depot. Yesterday, the company announced it would see a short-fall in its next quarter. The stock price lost 28% of its value.

Finally, let's take a look at valuation. Currently, Priceline.com has a $864 million market cap. The company expects to have about $1.3 billion in sales this year, which gives it a sales multiple of 0.66. Now, Amazon.com has a market cap of $8.9 billion and should have about $2.7 billion in sales. Let's assume that the company has a sales multiple that is at a premium to Priceline.com: 1. What would the stock price be? Well, it would be about $7.50.

But, as I've stated many times, I am bullish long term on the Internet sector. But for the time being, it would probably be wise to avoid the so-called blue chip Internet companies.



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