Tag Archives: AMZN

Avoiding the Death Zone–the Four Horsemen and the Nifty-Fifty


Climbers say that when you are over 24,000 feet, you enter the “Death Zone. Mistakes become lethal.

The death zone is the name used by mountain climbers for high altitude where there is not enough oxygen for humans to breathe. This is usually above 8,000 metres (26,247 feet).[1] Most of the 200+ climbers who have died on Mount Everest have died in the death zone.[1] Due to the inverse relationship of air pressure to altitude, at the top of Mount Everest the average person takes in about 30% of the oxygen in the air that he or she would take in at sea level; a human used to breathing air at sea level could only be there for a few minutes before they became unconscious.[1] Most climbers have to carry oxygen bottles to be able to reach the top. Visitors become weak and have inability to think straight and struggle making decisions, especially under stress. WIKI

So what does this have to do with investing?  When you pay too much for growth or quality, you may never recover. VALUATIONS MATTER ALWAYS!

First review the Nifty-Fifty Era when fifty stocks were “must own” for institutions in the 1970s due to their growth and quality.  Money managers herded into them similar to this: Money Managers Herding Video.

valuing-growth-stocks-revisiting-the-nifty-fifty  (Note page 22, you as an investor would have eventually broke even, but almost no one would have been able to seat through the 1980’s UNDER-PERFORMING a declining stock market!

Nifty Fifty   Ignore the second half of these notes.

Now think about how the pattern repeated in the Internet years of 1996 to 2000 when MSFT and INTC were the must own stocks of their era.

MSFT Monthly

INTC monthly

Congratulations! If you bought back in 1999/2000 when the press was lauding these “must own” stock for the future, you are now in the black.

Even if you pay too much for stable, high quality companies, you can lose even as the companies grow sales, cash flows and earnings year after year after year. Note: KO_VL_Jan 2013 (See P/E ratio as a proxy for investor enthusiasm and compare to financial metrics).   What is not to like?  So why did the price go sideways for almost a decade after 1998?   Investors adjusted their expectations.

Sun MicroSystems Case Study

One thing to never forget is that the market is mostly efficient but not ALWAYS efficient or correct. 2 plus 2 equals 4 not 10.   The last Internet frenzy gives a perfect case study in Sun Microsystems (SUN).

Sun Microsystems has always intrigued me. For a number of years, it seemed as if the company could do no wrong. During the early 1990′s, Sun occupied the top position in high performance computer workstations, a category of computing that has since virtually disappeared thanks to advances in PC hardware. Despite desperate attempts to unseat it from its leadership position by worthy competitors like HP, DEC, and IBM, Sun was able to prevail.

If you had purchased Sun stock in May of 1994, you’d have seen it skyrocket to nearly 100 times its value by August of 2000, just 6 years later. Had you kept it at the historical high price of $253/share, you’d have seen your investment lose more than 98% of its value when it came back down to just $3.17 a share by October 2008.

SUNW/JAVA stock price meteoric 100x rise and fall


It is easy to pull out a historical chart and say, “Look at the bubble popping.”  But note what the CEO had to say about the price of his company’s stock in 2002:

Q: Sun’s stock hit a high of $64 or adjusted in the chart above of $250. Did you think what tech stocks were doing two years ago was too good to be true?   (Date of the interview was March 2002).

A: No, she trained me well, and the stock made a nice move since we got married. But two years ago (2000) we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

Now, the same music is playing but the players have changed. 
New Four Horsemen1

New Four Horsemen

Are now driving the performance of the general stock indexes:

Fab Five

The Fab Five are “NEED TO OWN” stocks for money managers who wish to NOT underperform in the short-term.

  1. AMZN VL
  2. Goog_VL
  3. FB_VL
  4. MSFT VL
  5. GE_VL   certainly the the financial metrics, growth, and rising stocks prices make these easy “one-decision” stocks.

Let’s take AMZN because this company has a dominant position in retail that seems to be growing.

Amazon Key Stats

  • Trailing PE: 950.63
  • Forward PE:  117.65
  • Market Cap: $311.04 billion
  • Book Value: $26.50 per share
  • Share Price: $663.54
  • Price/Book: 24.27

Read more at How Amazons Long Game Yielded a Retail Juggernaut. Can’t you see many Americans becoming addicted to Amazon’s Prime service? Poor Wal-Mart and other retailers. However, IF AMZN doubles in market cap over the next 10yrs or a 7% annual return, and ends up trading at 21.9x earnings (current SPX p/e) in 2025, it needs to grow net income 55%/yr! Since 1973, 0.28% of companies have grown earnings at 55% for 10 years (Source: O’Shaughnessy). Do you like those odds?  Or are you so smart that you can tell that AMZN will win the lottery?

While valuation augur for CAUTION for stocks IN GENERAL:

GMO 7-Year 2015-11

The Bubble Right in Front of Our Faces

The True Contrarian

A MUST-READ ARTICLE:  The Nifty Fifty Becomes the Feb Five

Because when you enter the death zone you need to remember:


Have a great weekend and Thanksgiving for those in the USA!   How is your analysis of Valeant progressing? I hear crickets.

Update: The top 10 stocks in the S&P 500 are +13.9%. The other 490 are -5.8%. Largest spread since the late 1990s. Can you hear the bells ringing?

Capitulation IV; Analysts Like to Herd; Agony and Euphoria

Miner Sentiment

Bloomberg hating on gold. “Looks like a short”, “Nothing uglier”, “Not even an asset”…AFTER miners drop 90%.

What's uglier than gold

“The Direxion Daily Gold Miners Bear 3X Shares, or DUST, is up a whopping 99 percent in July.” via @

Grant on gold July 22 2015 Zweig   The same analyst who suggested buying miners within 1% of the all-time top in Sept. 17, 2011 now says gold is a “doorstop” in July 17, 2015.  NOW, he tells me!  Journalists chase price and sentiment.


Goldman sees gold to $1,000 (July 2015) and Goldman sees gold at 1840 by end 2012  Note a pattern?


Media piles on late in trend:

Perhaps today the absurdity has reached the apex of its crescendo with this utterly ridiculous “letter to gold bug” published by Marketwatch:   It’s time to surrender and let the yellow metal fall to its bear market low

Better analysis: Gold Warns Again and Heavy wears the crown

yen and gold

Amazon Beats


amzn 1 yr

How analysts react after Amazon reports–follow the herd recommendations regardless of price. Analysis?


The headlines reported that AMZN’s sales were up 20% year over year for Q2 and that net income had swung from a loss of $123mm to a profit of $92 million yr/yr for Q2.  While those numbers are what they are, sales growth from Q1 to Q2 was a mere 2.9% – pretty much in-line with the rate of inflation.

The media propagandists attributed AMZN’s highly “surprising” quarter to big gains in its AWS business segment, which is its cloud-computing business.  However, if we drill down into the numbers made available in its 8-K, we find that the AWS segment represents just 7.7% of AMZN’s revenue stream vs. 6.6% of revenues in Q1.   Sure seems like a lot of manic hype over well less than 10% of AMZN’s business model.

As it turns out, AMZN’s AWS business model, like everything else it does, is seeded in low quality sources of revenue that will ultimately prove to be unsustainable.  Why?  See this comment sent to me by someone who read my Amazon research report and who used to specialize in high tech accounting for Silicon Valley start-ups:

I audited many of the high fliers that crashed and burned, took companies public & was at the printers the day the bubble really burst which ultimately tabled that IPO…Amazon Web Services is growing by leaps and bounds and a significant amount of those $’s are coming from venture backed start-ups. Almost the entire Silicon Valley and other startups outside the Valley use AWS. Venture backed startups have exploded just as AWS revenues have exploded…That segment of their business will get walloped which right now seems to be a main source of their operating income.  

Read more: Dot con

Notice the difference between mining stocks and Amazon–Deja-Vu of the late 1999’s/2000.  Remember the music Sugar Ray

amzn fomo


Embracing Failure and Getting Obliterated in the Stock Market


“Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.” —Charles Mackay

You can’t learn without failure. Listen to this interview on the secrets of failing.


About this week’s guest:

About ideas and people mentioned in this podcast episode:



    • Creative Destruction, by W. Michael Cox and Richard Alm. Concise Encyclopedia of Economics.
    • Disaster and Recovery, by Jack Hirshleifer. Concise Encyclopedia of Economics.
    • Crime, by David D. Friedman. Concise Encyclopedia of Economics.

Web Pages and Resources:

Podcast Episodes, Videos, and Blog Entries:

Obliterated in the stock market (or the Perils of Momentum investing)

Before I sell everything and fire myself from ever managing money again, I’d like to share with you some of the percentage gain losses, from 8 WEEKS AGO to now, of some of 2013′s favorite stocks.

EXEL -58%

HALO -57%

IMPV -55%

RPTP -52%

GIMO -45%

BNFT -51%

CLDX -50%

FUEL -46%

ALNY -40%

YNDX -40%

DDD -38%

Read more: http://www.businessinsider.com/the-fly-out-2014-4#ixzz30C8MG0bc

A look at a Brazilian Turn-around Value Investor: https://www.santangelsreview.com/2014/04/28/book-review-and-lessons-from-dream-big-a-glimpse-inside-the-strategies-and-tactics-of-3g-capital/


See more: https://www.santangelsreview.com/2013/09/20/transcript-of-a-speech-by-jorge-paulo-lemann/

Businessweek has called him “the world’s most interesting billionaire” and Warren Buffett once said he was an “extraordinary manager.” However, despite purchasing three of the most iconic brands in America–Heinz, Burger King, and Budweiser–and building a tremendous track record as an investor and operator, Jorge Paulo Lemann remains virtually unknown. This is in no small part a function of his reluctance to comment to the press or speak publicly.

However, a few years ago, Lemann gave a speech to prospective Harvard students which was then uploaded to YouTube. The speech, which was delivered entirely in Portuguese, was entitled “What I Learned at Harvard.” In it, Lemann recounts his experience nearly getting thrown out of school at the end of his freshman year, his return the next year determined to succeed, and many of the lessons he learned as an undergraduate that he believes formed the framework for his later business success. Besides a few brief comments in various periodicals over time, as far as I can tell, this has been his only public speaking appearance in recent years. And for the first time it is accessible in English as I’ve had it translated and transcribed. It truly is a great speech from a fascinating investor.

Learn Accounting; Industry Metrics; Amazon; Geico Valuation; Klarman, Textbook Pubs. are Toast

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.” –Warren Buffett

To the Austrians, economics is not a tool of social control, it’s a framework for helping us understand humanity, its history, and our plight in the world”–Peter Boettke

Accounting and Financial Metrics of Industries

Learn more about accounting and a good source of industry metrics (please don’t share my secrets!)http://mgt.gatech.edu/fac_research/centers_initiatives/finlab/index.html

Heilbroner, a socialist, admits socialism is a total failure: http://reason.com/archives/2005/01/21/the-man-who-told-the-truth

Game over for text-book publishers


Valuation of GEICO

http://www.scribd.com/doc/78448120/Warren-Buffett%E2%80%99s-1995-GEICO-acquisition. There is something important missing in this valuation. Can anyone point it out?

Is America’s Debt a Problem?


Klarman and the Importance of History

Facing History and Ourselves.   I am sure this has been posted before, but if not, view this.   http://vimeo.com/32333102

Charlie479 Discusses AMZN

A generous reader shared this: Interesting comments from Charlie479 on AMZN (from VIC). Another example of an investor who thinks strategically and like a business person.

charlie479   12/20/11 11:25 PM AMZN one of the best companies I forgot to say that I chuckled thinking about the analyst making the “I want to buy Amazon at 100x earnings” pitch. I suppose that doesn’t necessarily make it mispriced but the earnings power is certainly higher than current GAAP net income. I think they could easily raise their prices by $0.63 per each $25 order (not exactly the same thing, but if Super Saver shipping was $0.63 instead of free, would that really change shopper behavior?). If they managed the business to maximize current profits like this, that $0.63 increase per $25 would double earnings. If sales grow like they did the past 12 months then suddenly the multiple isn’t looking so crazy. I’m not saying this makes AMZN one of the top half dozen stock investments in the world but the p/e might not be awful if your thesis is right.

I’ve occasionally wondered if someone could beat Amazon if they had $80 billion. I don’t think they could take over the #1 spot but I do think they could become competitive in a lot of areas. I would probably use the $80 billion to start several category-specific internet retailers, develop a large selection within that category, and drive turnover by capturing mind share as the expert in that category and as the lowest price seller, initially at losses. This is more or less the Amazon playbook, and companies like Diapers.com (before being bought), Newegg, and Blue Nile have managed to carve out niches. I bet there will be more. I think if VCs or public markets are willing to lose enough money for awhile, it isn’t that hard to replicate the warehouse network and other logistical moats.

Another reason to temper the who-needs-another-pipeline thought I posed in the previous comment is that consumers sometimes choose retailers for reasons other than price and selection. Certain bricks and mortar retailers will always have an advantage in terms of convenience (e.g. convenience stores, insightful eh?). And customers like to touch and try on certain products, like clothes, so I don’t see Amazon getting anything close to 50% share in those categories. Freshness matters, too, so it’s not clear grocery can be effectively penetrated by Amazon, and I bet that is a large portion of the Global Retail sales denominator. So, perhaps the current internet retail number at 3% is lower than what most people think, but maybe the maximum theoretical internet retail percentage is also lower than what most people think.

charlie479  12/20/11 10:47 PM AMZN one of the best companies

I think Amazon is one of the most admirable companies in the world. It has the expense advantages in rent and labor over B&M retailers that you mention, and it has cost advantages over other internet retailers as well. The massive sales volume makes the fixed cost percentages very low, and the inventory turnover in many products is so high that it can accept lower gross margins and still generate higher ROIC than competitors who charge a larger markup. The lower markup attracts more customers and generates more volume, which only reinforces the edge. It is the higher-turn/lower-markup Borsheim’s dynamic that Buffett describes.

The advantages aren’t limited to cost either. The high turnover also allows them to carry a huge number of SKUs at adequate ROIC, so they can offer customers the widest selection in many categories. For certain categories, after I browse Amazon and then Wal-Mart, I’ll come away feeling that Wal-Mart doesn’t have much of a selection. It’s hard to make Wal-Mart look narrow. Amazon is the first/last place many people shop because they know it has the widest selection and it’s likely to have that selection in stock.

Another non-price advantage is that they’re the most trusted internet retailer. I actually think those customer satisfaction ratings might be understating the difference. Their return policy and customer service is great. Even if a product is available from discountworldxyz.com at a slightly cheaper price, I’ll pay more to get it through Amazon because I know it’ll be the product I ordered, or else I’ll be able to return it. Who wants to deal with negotiating shipping costs or return policies with anyone else? I don’t think this is simply Amazon being more generous than discountworldxyz.com. They have the low-cost structure described in paragraph #1 that allows them to accept higher return costs while still generating better ROICs. I also suspect that their extensive review database reduces some of the likelihood of returns.

I think many retailers like Best Buy are at such a severe selection and cost disadvantage (even adjusting for sales tax) that their businesses are in trouble in the long-term. I even worry about beloved Costco. I no longer have no-price-comparison-needed-let’s-just-buy faith when walking down the aisles at Costco because Amazon has better prices frequently enough to make me doubt. More broadly, as someone who is cheering for the Costcos (no financial rooting interest, I just root for them because I admire them), I worry that Amazon will get to such scale one day that it’ll be a more efficient overall system for one UPS guy to drive from the Amazon warehouse and cruise through your neighborhood dropping off everything you and your neighbors need for the week. That might sound crazy but the current system of having you and all your neighbors separately drive SUVs 15-20 minutes to Costco to each walk through the aisles hand-picking and then checking out, doesn’t sound that efficient by comparison. I haven’t read anything about Bezos explicitly saying that’s his endgame but I wouldn’t be surprised if that’s in the 10 year wish list. If they end up with the cheapest and widest pipeline, there might not be much need for other pipelines.

Economics and QE2 Explained with Cartoons; A Future Case Study: Amazon

The First Economist

Hayek’s Road to Serfdom

A Reader’s Digest Version–thirty pages–of Hayek’s Road to Serfdom, plus cartoons.  Hayek and Mises both predicted the inevitable collapse of socialism and fascism. http://www.cblpi.org/ftp/Econ/RoadtoSerfdom


Quantitative Easing explained in a cartoon video. http://www.youtube.com/watch?v=PTUY16CkS-k  About five million viewers have watched this video of two bears (dogs?) asking simple questions about monetary policy.  The theory at issue here is Keynesianism  which assumes that stimuli from government, a category that includes QE2 (Quant. Easing for the second time), are beneficial. Really? Why?  If economics can neither be explained in plain English nor understood then it’s probably bunk.

For a Future Case Study on Moats


Amazon Says Long Term And Means It By

In 1997, the year Amazon.com went public, its chief executive, Jeff Bezos, issued a manifesto: “It’s all about the long term,” he said. He warned shareholders “we may make decisions and weigh tradeoffs differently than some companies” and urged them to make sure that a long-term approach “is consistent with your investment policy.” Amazon’s management and employees “are working to build something important, something that matters to our customers, something that we can tell our grandchildren about,” he added.

But shareholders seem never to have gotten the message. In October, when Amazon reported strong third-quarter revenue growth and earnings that were pretty much what the company had predicted, but indicated it would be spending more to support continued growth, investors hammered its stock. Amazon shares dropped nearly $30, or 13 percent, to $198 a share in just one day, Oct. 25. This week they were trading even lower, at $181.

Over the years, Amazon shares have been periodically buffeted by short-term results that seem to have disappointed investors. “The stock has been bumpy,” a Morgan Stanley analyst, Scott Devitt, told me this week. “Investor trust seems to go in cycles.”

The notion that public companies should maximize shareholder value by managing for the long term is pretty much gospel among good-governance proponents and management experts. Jack Welch advanced the concept in a seminal 1981 speech at the Pierre Hotel in New York and elaborated on it in subsequent books and articles while running General Electric, when G.E. was widely lauded as the best-managed company in the country. It has been especially championed in Silicon Valley, where technology companies like Google have openly scorned Wall Street analysts and their obsession with quarterly estimates and results by refusing to issue earnings guidance.

Amazon, in particular, has been true to its word to manage for the long term. It remains one of the world’s leading growth companies and its stock has soared 12,200 percent since its public offering. In late October it reported quarterly revenue growth of 44 percent to almost $11 billion, which came on the heels of 80 percent growth a year ago. “We’re seeing the best growth which we’ve seen since 2000, meaning in 2010 and so far over the past 12 months ending September,” the chief financial officer, Thomas Szkutak, told investors in October. But operating earnings fell sharply to $79 million. While that was in line with most estimates, Amazon offered a forecast for the fourth quarter in which it said it might lose as much as $200 million or earn as much as $250 million, and even the high end would represent a 47 percent drop.

The reason Amazon is earning so little while selling so much is that it is spending so much on long-term growth. It’s opening 17 new fulfillment centers — airport hangar-size storage and shipping facilities — this year and aggressively cutting prices. Its profit margin for the quarter was just 2.4 percent, and it said it might be zero for the fourth quarter. (By comparison, Wal-Mart’s margins are 6 percent on revenue of $440 billion. )

Amazon seems to be taking customer focus to new levels, willing to run its ever-bigger global business while earning little or nothing in return. To the dismay of some, Mr. Bezos even takes a long-term view of price cuts. “With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease,” he told shareholders in 2005. But that kind of thinking, he added, is “short term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or 10 years or more.” Selling at low prices may undercut profits, but they create “a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com,” Mr. Bezos said.

Amazon has done little to dampen speculation that it is selling its revamped Kindle e-reader devices and its recently introduced Fire tablet at a loss. Amazon simply doesn’t think like most other companies. When “we think about the economics of the Kindle business, we think about the totality,” Mr. Szkutak said. “We think of the lifetime value of those devices. So we’re not just thinking about the economics of the device and the accessories. We’re thinking about the content.” In other words, profits will come down the road when Kindle users buy content through Amazon.

“If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people,” Mr. Bezos told reporter Steve Levy last month in an interview in Wired. “But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We’re willing to plant seeds, let them grow—and we’re very stubborn.”

Whatever they might say about long-term shareholder value, this is simply too much for many of today’s investors, many of whom are hedge funds, pension funds and institutions who measure their results — and earn their pay — based on quarterly benchmarks. “If you look at the average length of ownership of a stock, the period is declining,” Mr. Devitt said. “Amazon is marching to a different drumbeat, which is long term. Are they doing the right thing? Absolutely. Amazon is growing at twice the rate of e-commerce as a whole, which is growing five times faster than retail over all. Amazon is bypassing margins and profits for growth.”

For Amazon, long-term growth confers two major benefits: the kind of economies of scale enjoyed by Wal-Mart and eliminating or weakening competitors. The book retailer Borders has been forced out of business and a rival, Barnes & Noble, is struggling. Best Buy, the electronics retailer, reported this week that earnings plunged 29 percent, despite higher revenue and a surge of Black Friday sales, because the chain had to cut prices and offer free shipping to compete with Amazon. Amazon inflamed many competitors this holiday season by offering extra discounts to shoppers who took mobile devices into stores and then used them to compare prices and order from Amazon.

The revamped Kindle line and especially the new Fire tablet illustrate Amazon’s long-term strategy. “Amazon has much greater ambitions than near-term profits or margins,” Ken Sena, an Evercore analyst, said.

“Some people are griping that the Fire is sub-par,” Mr. Sena continued. “It’s not an iPad. And some investors are confused. Why would they give it away, even lose money on it? But getting it into as many hands as possible is important to them. They’ll use it to drive higher physical and digital good sales on their site. And these devices also bring Amazon deeper into the local retail opportunity, not to mention the app marketplace potential that exists. Media sales on the device are just the beginning. I think Amazon understands all these components.”

The Fire “isn’t meant to be another iPad,” Mr. Devitt noted. “It’s a device to sell Amazon content. All indications are it’s a success. It’s the most gifted item on Amazon. It’s too soon to tell, but it seems more promising than it’s getting credit for.” This week Amazon said it had sold more than a million Kindles a week for the last three weeks.

Nearly 15 years after Amazon’s public offering, it’s safe to say that Mr. Bezos and his colleagues have realized their goal of creating a company to tell their grandchildren about. But one of these days Amazon has to deliver on its promise of higher margins and profits, however long term that may turn out to be. “To many investors, long term is a year,” Mr. Devitt said. “For Bezos, he’s looking at a 10- to 20-year time line. When he says long term, he means 2020 or 2030.”

Now from http://ycharts.com/  Amazon: Free Shipping and Low Prices Don’t Add Up To a Moat By Jeff Bailey

The smartest guy in financial journalism, James B. Stewart, earlier this month in his Saturday New York Times column, praised Amazon (AMZN) for taking the long view in building its business and criticized the company’s critics for failing to appreciate the company’s steadfastness. (See above.)

Amazon revenue continues to rise spectacularly. Its profits, however, have fallen, as margins are squeezed by aggressive product pricing and surging use of the company’s popular free-shipping option. So, the question seems to be, will those strategies help Amazon build what Warren Buffett would call a moat – a protective fortress around its business that long-term allows it to reap substantial profits and build value?

Stewart, author of several fabulous business books, including “Den of Thieves,” about the late-1980s Wall Street scandals, and a Pulitzer Prize winner for his work at the Wall Street Journal, is such a well-regarded thinker about companies that we at YCharts were forced to stop and consider his point of view; he’s not just another pro-Amazon tout.

We have regularly written that we view Amazon as overvalued and have marveled at how its recent growth has made it less profitable, not more so.

The critics have certainly influenced Amazon’s share price in recent months.

Amazon.com Stock Chart by YCharts

Yet the PE remains in the 90s, and this for a company with a plunging and razor-thin profit margin.

Amazon.com PE Ratio Chart by YCharts

Stewart’s admiration of Amazon certainly makes sense if you’re an Amazon customer. The service is wonderful, and like so many American shoppers during this holiday season we have ventured into actual stores very few times because shopping online – from Amazon and its many imitators – is so much easier. That change in consumer behavior seems to suggest a moat is forming. But does the moat encircle Amazon protectively, or is it instead a moat encircling bricks-and-mortar retailers into a market-share-losing ghetto?

The brutal price-comparison ethic Amazon unleashed on the book business years ago helped it take huge market share. But it also rendered the book business less profitable for all players. And as that ethic unfolds across product categories – aided most recently by Amazon’s Price Check app – results at Amazon and Best Buy (BBY) would suggest the greater transparency on pricing is helping consumers, but not so much retailers.

Running Borders out of business, sadly for Amazon and other booksellers, didn’t make the book business more profitable again. Rather, the pricing model Amazon brought to the market seems to have rendered book retailing a crummier business. And it’s also unlikely that consumer electronics and the other categories Amazon is transforming will, once a few large competitors go bust, miraculously become more profitable. There isn’t a shortage of players in any of these markets and the consumer behavior Amazon helped spur – constant price shopping, demanding free or reduced-priced shipping – would seem impossible to reverse.

The Wall Street Journal recently noted the toll free shipping is taking on retailers’ profits. The Journal, noting Amazon’s shrinking margins, said, “Free shipping has likely played a meaningful role in this, although the company hasn’t detailed the cost.”

Actually, Amazon does detail the cost in its 10-K filings (page 26). Its net shipping costs – total shipping costs minus what Amazon collects from customers for shipping – totaled $1.39 billion in 2010, up 63% from $849 million the prior year. Total sales were only growing by 40%. So net shipping costs were equal to 4% of sales in 2010, versus 3.4% in 2009. That trend may have accelerated during 2011, and could largely explain why profits have fallen.

The strategy Stewart lauds is doing a bang-up job of boosting revenue. And consumers love Amazon’s service. But it’s hard to see how the company is going to fatten its margins when competition remains fierce; consumers have been taught to demand low-low prices (and free shipping); and beyond elegant technology, Amazon’s main tools for attracting consumers are both margin killers — low-low prices and free shipping.

Certainly the Kindle is an attempt to build a moat around Amazon’s book business. Selling the devices at what has been reported as a loss suggests the company sees future payoff from Kindle-owning consumers downloading their reading (no shipping expense here) exclusively from Amazon. But in the more general merchandise categories that increasingly make up Amazon’s sales, it’s hard to see how to insert such a loyalty device.

Stewart’s argument seems in part based on the notion that, forgoing current profits, Amazon must be managing for the long term. But if your very pricey stock is reliant on spectacular revenue growth, a cynic might reason that a strategy of adding sales — even if they’re increasingly less profitable (or money-losing) – appears short-term and somewhat desperate.

Amazon management is smart, as is Jim Stewart, and investors could be inviting ruin by shorting Amazon shares. But to us, the company hasn’t made a persuasive case that it’s building a moat – just that it’s delivering great service and selling stuff cheaper than the next guy.   End.

Let’s revisit our study of whether Amazon has a competitive advantage or not after we finish our study of Competition Demystified (in the VALUE VAULT).