Should You Buy AMZN Stock? 3 Pros, 3 Cons

by Jim Woods | February 18, 2014 12:00 pm

If you were on the sidelines wondering whether to buy Amazon (AMZN[1]) stock over the last several years, you missed out on a whole lot of upside. In fact, the past five years have seen the iconic online retailer’s shares soar. AMZN stock is up an incredible 460%, making it one of the best-performing widely held stocks out there.

Yet times have been rather strange for Amazon of late. So far in 2014, the shares are down more than 10%, which is a move AMZN stock owners (myself included) just aren’t used to seeing.

Moreover, the company’s latest quarterly earnings release missed expectations, and AMZN stock was actually downgraded recently by a major brokerage firm — something that’s been a rarity throughout the online retailer’s storied history.

Now the question confronting shareholders (and would-be shareholders) is whether AMZN stock is a buy or a sell. Does the recent pullback mean you have a chance to own a market dominator at a discount price, or is it a harbinger of more pain ahead?

Here are three pros and three cons for buying AMZN stock.

Pros on AMZN Stock

Huge Growth. Although Amazon failed to beat analysts’ estimates in Q4, it’s not like its EPS growth is trending lower. In fact, the company’s Q4 EPS of 51 cents is more than double its bottom-line showing during the same quarter a year ago. Things get even better when you look at the fiscal full-year performance, as AMZN benefited from a net sales increase of 22% to $74.45 billion year-over-year in 2013. In Q4 alone, net sales increased 20% to $25.59 billion in the fourth quarter, compared with $21.27 billion in fourth quarter 2012. That’s a lot of buying going on at Amazon.

Unequaled Innovation. From selling books to becoming the biggest bookseller in history to then becoming the biggest online retailer in the world, Amazon and its genius founder and CEO Jeff Bezos has proven year after year that they know how to implement unequaled innovation in its industry. That innovation continues, and hence we’ve seen the growth of the company’s streaming video business, its Kindle e-reader and tablet devices, and even its relatively new Amazon Fresh grocery options. And just to prove it’s really out there on the cutting edge of technology, the company also said it plans to make deliveries via drone devices[2] sometime in the near future — another development that could send AMZN stock upwards.

Prime Revenue. Membership has its privileges, and in the case of AMZN stock, the company’s Amazon Prime membership service is helping propel sales. The service, which I admittedly use on a regular basis, offers free two-day shipping on qualified purchases. That’s a big money-saver for me, and for other heavy Amazon users. I also get unlimited movie streaming, and little bonuses such as one free borrowed e-book per month. At a cost of just $79 per year, Amazon Prime is a bargain. Apparently, I’m not the only one who thinks so, as Amazon recently confirmed that it has more than 20 million Amazon Prime members[3].

Cons on AMZN Stock

Unusual Financial Metrics. Amazon is somewhat of an unusual bird when it comes to its financials. The company makes massive revenue, but in terms of its actual profit, well, it’s actually quite tiny. Yet this is all part of the plan for Amazon, as it chooses to pour money into R&D, while also making sure its margins are razor thin in order to put pressure on competitors. The small profit margins and the small overall profit mean that any disappointment in forward guidance can make AMZN stock holders a little nervous. So, when Amazon’s guidance for Q1 revenue turned out to be a bit lower than Wall Street was anticipating, it was more cause for alarm.

Selling Fever. While the recent selloff in AMZN stock can be attributed to the wider weakness in the market in late-January, Amazon’s earnings miss didn’t help bolster shareholder confidence. Given the big unrealized gains many investors have in AMZN stock over the past couple of years, it’s no surprise that many professionals felt the need to lighten-up on AMZN positions. That selling has put AMZN stock below short-term technical support at the 50-day moving average and if the shares fail to recapture this level, it could be a bearish catalyst going forward.

Prime Price Increase. Last week, UBS analyst Eric Sheridan downgraded AMZN stock to “neutral” from “buy.” The reason: UBS commissioned a survey to see what effect, if any, an increase in the price of Amazon Prime would have on existing customers. Free shipping on a mass scale is something that has cut into Amazon’s bottom line … but instead of the $79 a year currently paid, would the market bear $99 a year, or even $119 a year? According to UBS, the answer is a definitive “no,” and that means Amazon Prime might not be as big a pro for AMZN stock as one might suspect.

Verdict on AMZN Stock

When I first got into this business in the early 1990s, I was taught that if you wanted to make really big money, you bought tremendous companies that dominated their respective industries — and you did so when the shares were undergoing a pullback. This is good advice … and while it’s not always the right play, I think this early lesson is indeed applicable in the case of AMZN stock.

Sure, there are concerns over revenue and profits, Amazon Prime and AMZN stock getting caught up in a wider selloff; however, I believe these cons are surpassed by the more persuasive pros of huge growth, game-changing innovation and Amazon Prime’s existing service.

For me, the verdict is indisputable. Buy AMZN stock — and do it today.

At the time of this writing, Jim Woods was long AMZN. 

Source URL: https://investorplace.com/2014/02/amzn-stock-amazon/

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