Buy AMZN Stock, But Only a Big Pullback
By Jeff Reeves
Editor, InvestorPlace.com and The Slant
Betting against Jeff Bezos and Amazon (AMZN) is a fool’s errand. The stock has soared 650% in the last five years and 55% YTD in 2013. But if the question is whether to buy Amazon stock or an alternative, I advise looking elsewhere.
I simply don’t trust this stock at these levels — and not because of the forward P/E of 140. It’s more about the sentiment that profits are inevitable, and the reality that those profits may be harder to come by.
Consider Amazon spent about $3.8 billion on capex in 2012, a is pacing about the same number — perhaps even more — for 2013. Perhaps this kind of cash burn on research and expansion is “normal,” something that would be uncomfortable for investors betting on simply rolling that money over into the earnings column
Consider much of the spending at Amazon isn’t actually to create margins but just to maintain its model – more data centers to deal with e-commerce, content downloads and its Web Services division, more subsidized Kindles to feed content sales via e-books and video, more distribution centers to meet the expectation of prompt delivery for most item. That’s all revenue growth — NOT profit growth.
Lastly, consider Tesla (TSLA) — a red hot momentum stock that continues to see big success, but recently took a 30% tumble in two weeks this fall. Was it because Tesla is going bankrupt? Hardly… it was simply because Tesla showed it couldn’t live up to the magical fairy tale that Wall Street’s hype machine had created, and expectations had to get more realistic.
For the record, I bought Tesla stock on the pullback because I believe in the long-term prospects of the company. And I would buy Amazon on a 20% to 30% pullback, too.
But at these levels? Too much success is assumed and too much can go wrong. Count me out until the price gets more reasonable.