by Jonathan Berr | November 15, 2013 9:46 am
Amazon (AMZN) continues defying naysayers and rewriting the rules of how stocks are supposed to behave. Even so, Amazon stock is a tough one to recommend.
Shares of Seattle-based AMZN have surged nearly 800% over the past five years, which is improbable for many reasons. First, Amazon hasn’t generated consistent profits since around 2011. During the most recent quarter, it lost $41 million, or 9 cents per share of AMZN stock. While that was narrower than the year-earlier loss of $274 million, or 60 cents per share, it’s still a loss.
Plus, Amazon ended last year in the red and no one has any idea when AMZN will be consistently profitable.
Heck, the fourth quarter — which includes the critical holiday shopping season — is often put under a microscope for retailers. But guidance for Amazon was for anything from a loss of $500 million to an operating profit of $500 million.
If any other company on the planet offered such a wide-ranging guidance, it would be mocked far and wide.
But no one is laughing at AMZN, because Amazon stock investors are too starstruck by its sales growth. Amazon sales have grown from $34.2 billion in 2010 to $61 billion in 2012 — a gain of more than 78%. And Amazon stock analysts expect sales at what has been dubbed “the everything store” to reach $71.9 billion this year and $91.5 billion next year as AMZN dips its toe in everything from cloud computing services to grocery delivery to video entertainment.
But while the innovation at AMZN is nice, there’s a good chance all its new business experiments won’t make money. As Bloomberg Businesweek’s Brad Stone noted, Amazon CEO and Chief Visionary Jeff Bezos doesn’t sweat mundane details about quarterly Amazon earnings and balance sheets. He doesn’t even show up on earnings conference calls.
“Bezos manages Amazon for the long term and regularly mucks up the bottom line with expensive, risky bets on unprofitable new businesses such as grocery deliveries and tablets,” wrote Stone, author of the book “The Everything Store: Jeff Bezos and the Age of Amazon. “There’s red ink as far as the eye can see.”
One problem with this approach is that it’s expensive. Total operating expenses for AMZN surged 24% to $17.12 billion in the most recent quarter, thanks in part to surging spending on technology and content. Meanwhile, revenue grew 24% as well.
Normally, investors would be worried if expense growth was keeping pace with revenue growth. But Amazon certainly believes that you have to spend money to make money — and AMZN stock investors seem to have bought in to that theory. This strategy is evident from the company’s razor-thin profit margins.
Of course, as a consumer, I also have to admit that it works like a charm. Take the Amazon Kindle. AMZN doesn’t make a nickle from the e-reader, hoping to profit from the sale of e-books. Remember, Amazon dominates the digital book market.
A similar story can be said for Amazon Prime. By charging a flat $79 fee for guaranteed two-day shipping, AMZN is encouraging people to shop on the site who might not have otherwise — and to shop on it more. It worked in my case.
But that doesn’t mean AMZN stock is a buy.
Sure, Amazon stock analysts think AMZN is a buy. But I simply can’t wrap my head around the fact that Amazon stock trades at disgusting 140 times expected 2014 earnings. That’s a huge premium to Google (GOOG) stock, which has also been going strong, yet sports a multiple of just 20. And Apple (AAPL) stock goes for just 11 times forward earnings.
Oh, and unlike Amazon, Google and Apple make boatloads of money.
Meanwhile, the 52-week price targets on Amazon stock range from $310 to $460, indicating analysts are taking a dart-and-blindfold approach to picking the direction of the AMZN stock price.
The point is that Amazon stock is not a pick for the faint of heart, or people with “hang-ups” on stuff like valuation. Maybe if you don’t mind big-time risk and laugh in the face of danger, by all means add Amazon stock to your portfolio.
Otherwise, stick to being an AMZN customer.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
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