Should I Buy AMZN Stock? 3 Pros, 3 Cons

The stock price has slipped lately as investors worry about growth

   
Should I Buy AMZN Stock? 3 Pros, 3 Cons

For the year so far, Amazon (AMZN) has gotten off to a shaky start. The stock is actually off about 9% so far.

amazon1 Should I Buy AMZN Stock? 3 Pros, 3 ConsThen again, Amazon had a disappointing fourth quarter, which didn’t help AMZN stock. Revenues increased 20% to $25.59 billion, which was below the Street forecast of $26.1 billion. There was also weakness on the bottom line. In Q4, net income came to $239 million or 51 cents per share of AMZN stock. Yet the consensus estimate was for 66 per share.

Is Wall Street overreacting? Here’s a look at the pros and cons on AMZN stock:

AMZN Stock Pros

Barriers to Entry: The barriers to entry are substantial. Let’s face it, Amazon is a tremendous global brand. But the company also has a massive infrastructure. Consider that there are 40 fulfillment centers in the U.S. alone, as well as facilities in Europe, Canada, China, India and Japan. Of course, the infrastructure is full of sophisticated technologies, even robots. As a result, AMZN has a highly efficient system. The company is able to turnover inventory quickly, which means it generally collects from customers before having to pay suppliers.

Innovation: AMZN CEO and founder Jeff Bezos has proven adept in dealing with the dynamic changes in the tech industry. For example, he was the pioneer in the tablet market with the launch of the Kindle. But he has also been smart in leveraging his infrastructure to create new revenue opportunities, like Amazon Web Services (AWS). In fact, AWS has been able to win deals against big companies like IBM (IBM). Prime and Amazon Fresh have continued the innovation trend.

Secular Trends: Ecommerce is playing in Amazon’s favor. According to Euromonitor, the North American market is expected to hit $360 billion by 2017, which would represent a 14.5% compound annual growth rate. The traditional retail market sports a growth rate of a meager 3% or so. Mobile also represents another huge opportunity. The number of U.S. mobile online shoppers, according to IDC, are expected to go from 52 million in 2012 to 189 million by 2017. That’s a 29.3% compound annual growth rate. The good news is that AMZN has been investing heavily in mobile technologies and should continue to benefit from its Kindle platform.

AMZN Stock Cons

Competition: The ecommerce market has been undergoing lots of innovation lately — and this could mean more pressure on AMZN stock. Some of these companies are also tapping the red-hot IPO market, such as Zulily (ZU), whose stock is up 172% since is offering in November. But there is also competition from traditional players like eBay (EBAY) and even Groupon (GRPN), which has been building its own warehouse system. And never discount the potential effect of the Alibaba IPO.

Valuation: Even with the recent drop in AMZN stock, the valuation is far from cheap. The price-to-earnings ratio is a nose-bleed 619! But this should not be a surprise. For the most part, AMZN is a low-margin business. Unfortunately, that high valuation is expected to stick around for some time.

Delivery: Delivery issues continue to plague AMZN stock. These problems became clear to customers during the holiday season. UPS (UPS) botched orders, delivering packages late. Of course, AMZN is known for its great customer service. But because it relies on third parties for deliveries, the brand is always at risk. So the company’s focus on Fresh could be important as it could lead to nation-wide delivery system. But that will take time and likely be extremely expensive.

AMZN Stock Verdict

Since its launch in the mid-1990s, AMZN has found ways to keep up its growth rate and remain on the cutting-edge. It certainly helps that Jeff Bezos is a tremendously skilled leader and visionary.

But the challenges he now face may get even tougher. Again, the competition is getting intense, with Alibaba likely becoming a major factor. The reliance on third-parties for delivery is another problem and there is no clear-cut solution.

But perhaps the biggest challenge is maintaining focus. AMZN is now in a multitude of businesses and the managerial complexities will be mind-numbing. As seen with once-fast operators like Cisco (CSCO), there is always a risk of being overstretched. And with the valuation of AMZN stock at high levels, there really isn’t much room for failure. Wall Street has come to expect mostly good things from the company.

So should you buy AMZN stock? No — for now, there are too many risk factors that could put pressures on AMZN stock.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/03/buy-amzn-stock-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

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