Amazon Becomes Just Another Retailer

About the best news to come out of Amazon.com's earnings report last night is that the company doesn't look like it will run out of cash anytime soon.

But that's about where the good news ends.

For the record, Amazon reported a pro forma loss (excluding certain charges) of 16 cents a share, 6 cents better than estimates. Revenues of $668 million came in at the low end of $650-$700 million estimates, and the company guided third-quarter revenues down to $625-$675 million from estimates of $733 million. The third-quarter pro forma loss is expected to be about 16 cents a share, flat with the second quarter. Amazon has clearly traded away growth in its push for profitability: Growth in the core books, music and video operations was up just 1% year-over-year.

The company also announced a $100 million investment from and partnership with AOL that could boost sales next year. And the good news is that with $609 million in cash and marketable securities (down from $643 million on March 31), Amazon should be around to see what that alliance brings.

But the real stretch is imagining how the company will get to pro forma operating profitability by the fourth quarter. Going from two straight quarters - seasonally weak or not - of 16-cent losses to breakeven in one quarter is quite a jump, and analysts are rightly skeptical of whether the company can do it.

The bottom line is that Amazon has become a slow-growing, unprofitable retailer. Admittedly, a class operation and a groundbreaking company, but that doesn't make it a great investment, at least not at these levels, and that's the business of this column. Heck, Jeff Bezos himself forthrightly said a year and a half ago that individual investors had no business buying AMZN stock. That still appears to be the case.

So what is Amazon worth? Using the rawest measure of valuation, most retail stocks trade at a price-to-sales ratio of about 1. Wal-Mart trades at a PS ratio of 1.1. Amazon at yesterday's close of 16.03 traded at a PSR of 1.45, giving AMZN stock a fair value of just over $11 a share, a 31% drop from here.

Are investors likely to see that price? It's not out of the question. Amazon (see chart below) should gap below its 50-day moving average at 15.03 when it opens for trading this morning, a bearish development if it stays there, and most indicators should give sell signals. Since its big gap up in April, the stock has been forming a flat-topped broadening pattern, which is bearish. Taken literally, that pattern predicts a move to $5 a share, but support could be found in the 12.50-14 range and at 11, the top of the 8.30-10.70 gap. If the stock enters that gap, it could fill and retest the lows. A move back above the 50-day moving average would be constructive, and a break above 17.50 would be bullish.