Steer Clear Of This High Flying Online Retailer

In an interview on CNBC, Blue Nile (NILE: 59.76 +1.14 +1.94%) President and CEO Diane Irvine said “[Monday] looks to be our best Cyber Monday ever…we’ve exceeded our expectations, and I think what you’re seeing is that consumers are coming online and seeing the convenience and the value”.

There’s that word again, value. But while Blue Nile may offer value to affluent shoppers, with a trailing P/E of 81, the stock sure doesn’t offer any value to investors.

Blue Nile was founded in 1999 and has grown into the largest online retailer of certified diamonds and fine jewelry in what is an extremely fragmented market, largely dominated by small mom-and-pop shops. But the company fills a definite need and market demand based on a simple idea: diamonds can be simple to understand and choosing an engagement ring need not be complicated.

The company’s success allaying consumer anxiety and educating buyers has won accolades from Time, The Wall Street Journal, and Forbes over its ten year history. Two of my good friends bought engagement rings and wedding bands from the site, and raved about the outstanding value and great service.

But oftentimes the share price of strong performers exceeds the true value of the company. And this is certainly the case with Blue Nile.

Blue Nile’s stock has increased 168% over the last 52-weeks. That performance tops the S&P 500’s 34% rally and the S&P Retail Index’s 69% gain. But this extreme out-performance is not where the story ends with this high flyer.

Blue Nile has grown revenues at just an average annual rate of 7.6% from 2006 through 2009 (including estimates for 2009 Q4), and increased earnings per share at only 8.3%. Hardly the explosive growth that the stock’s current P/E would suggest. Clearly forward guidance should validate the share price, right?

Wrong. Consensus analyst estimates for 2010 revenue and EPS growth are 15% and 29%, respectively. That puts 2010 EPS at $1.12, and the stock is trading at forward P/E of 53. That’s still extremely rich, no matter what kind of jewels the company sells. And even though affluent shoppers may increasingly opt for a $20,000 piece of jewelry from Blue Nile versus the same thing on Fifth Avenue for $30,000, the company’s slim 3.8% profit margin will require much more then 15% revenue growth to justify the stocks price.