Following this week’s drop of around 12%, which drove down AMZN $30 from around $236 to $206, one has to wonder: how much is Amazon worth? And is Amazon really worth $94 billion at the current price? Or is worth less?

To answer this question, let’s examine Amazon’s business, its current and potential competitors, and its potential and prospects on the long run…

What does Amazon do to make money?

Well, Amazon started out as a company that sells books, and then expanded to selling multimedia items such as movies and CDs, and then expanded to sell nearly everything (with the exception of cars and houses). Amazon usually sells at competitive prices, but sometimes your local store sells the item for less when that item is on sale. In any case, Amazon has a successful business model and it is highly trusted by its customers (although there are lots of fake/paid reviews on Amazon by the so-called “top-reviewers”).

Amazon also sells Kindle, an electronic book reader, that a lot of people who love reading books were duped into buying at an exorbitant price. The Amazon device can only read books. Compare that to the iPad and the Samsung Galaxy Tab (which, in my opinion, is the best tab currently on the market, but don’t take my word for it – do your research first) that can do nearly everything a PC can do, and can read books. Amazon was able to suck a lot of money from the Kindle, both through selling the now soon-to-be-obsolete hardware and for charging fees to its customers for using the whisper network to download e-books. We all know that Kindle will not stay for long, and here’s why:

– Electronic pads (such as the Galaxy Tab and the iPad) are much better at reading books than Kindle.
– People who buy a pad will not buy a Kindle.
– People who already own a Kindle will be a pad and will read books on the pad.
– People can read many books for free by using any pad, which is not restricted by a technology or a network (you just need an Internet connection).

Amazon apparently understands this and has created the “Kindle Fire”, a 7″ pad, which is supposed to compete with the other pads on the market, taking advantage of Amazon’s vast database of movies, music, and books. The Fire is also very nicely priced at $199 (compare that to $299 for the comparable Samsung pad). But, the Kindle Fire does not have an SD card placeholder, its screen resolution is not as good as its competitors’, it seems to be restrictive when it comes to content, it runs on an unknown OS developed by Amazon, its processor is very slow when compared to others, and it is only created to turn the buyers of the device into cashcows by luring them into buying paid content.

I think the Kindle Fire is a bit too little too late.

Amazon’s competitors

Amazon’s current competitors are really every retailer on the planet with an online presence, from Walmart to Sears. These traditional competitors pose no real threat to Amazon’s business, simply because both Walmart and Sears lag behind when it comes to technology adoption.

Amazon’s future competitors are Apple, Samsung, Sony, and the likes. I think in 10 years the absolute majority of books sold will be electronic. People will prefer streaming movies instead of buying them, and PCs will be dumped in favor of pads. That’s in only 10 years from now! Apple, Samsung, and Sony are racing against each other in order to gain an upper hand in this digital market. Amazon, although once the pioneer in selling digital goods, now lags behind.

Other competitors include Netflix and Hulu…

Amazon’s potential and prospects

Amazon still has a huge potential as its name is trustworthy and it still controls the online retail market. Amazon can leverage that control to sell its products, specifically the Kindle Fire. However, the Kindle Fire, as it currently is, will guarantee Amazon the same fate as RIM. This is because Amazon is using a closed OS (the same way RIM did with its Blackberry phones) which means that users are restricted and have much more less applications than in Android powered tablets, for example (by the way, I think Apple will suffer the same fate as well, but not in the so-near-future).

If Amazon opens up its Kindle Fire and enhances its technical specifications, then it may have a significant chance of controlling the tab market, and consequently be able to maintain its control on both the books and the digital media markets. Let’s just hope that executives at Amazon will not be as stubborn as those of RIM.

Now, after examining the above, how much is Amazon really worth?

Well, if the Kindle Fire doesn’t really fly with the customers, then a P/E of 10 is more than enough for Amazon, which means that Amazon’s stock should be trading at $20 (yes, $20). This is because Amazon will no longer be in control of the online retail market (within 10 years, almost all of the online transactions will happen through pads or through the smartphones – each maker of a smartphone/pad will drive transactions to his affiliates, that may or may not include Aamzon).

However, if the Kindle Fire becomes really on fire, then a P/E of 25 is the best that Amazon can do. Which means that that AMZN should be priced at around $50.

In any case, I think that Amazon is way overvalued with a P/E ratio of over 100 (come on investors, are you sure that Amazon will still exist in 100 years from now)?

I have warned against Netflix before, and now look at the results. Now I’m warning against Amazon, even if Amazon has a great result next quarter (and I doubt that it will, with all the overhead), it’s still overvalued by around 75% (AMZN is now trading at $206). But then again, no one listened to me about Netflix, and probably nobody will listen to me about Amazon.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.