Amazon (AMZN) has been stuck in 2014, with the stock down 17% vs. 8% gains for the broader market.
And sadly, more pain is in store for AMZN stock based on the latest moves from Jeff Bezos & Co.
Disappointing profits and an ill-advised push into hardware with the Fire Phone had already troubled many AMZN Amazon stock investors.
Why AMZN Stock Is In Trouble
An important sentiment shift has happened with Amazon in the last year or so. While AMZN stock has long traded for a high earnings multiple with investors trading profits for revenue growth, Wall Street has been running out of patience.
If Amazon profits have been meager for the short-term, the thinking goes, what guarantee do we have that the company will become profitable anytime soon?
And what with a hot stock market full of other growth opportunities that are trading current profitability for long-term market share, AMZN stock isn’t the only game in town.
Adding fuel to the fire is the fact that this focus on margins has come even as the company is digging deeper into unprofitable operations — namely, with the Amazon Fire Phone. CEO Jeff Bezos has admitted that the company’s Kindle Fire tablets have been sold at cost in an effort to build scale, and a smartphone is destined to have the same challenges.
What’s Up with Amazon Ads?
Now we get news that Amazon is going to take on Google (GOOG) in the online ad market by developing its own ad-serving software.
Let’s stop for just a moment and acknowledge that of all the places to explore for growth, online ads are a decidedly poor choice. Whether it’s Yahoo (YHOO) or AOL (AOL) or Google, plenty of other advertising players have proven that making money on internet ads is no easy game. The only way any of these players makes headway is to make up for declining advertising rates with higher volume — and AMZN successfully claiming share in this desperate environment isn’t an easy task.
Furthermore, companies like Yahoo and Google have a pretty much singular focus on the ad biz — and while they dabble with other projects in the interest of diversification and long-term growth, there’s no doubt advertising is their “core competency” as tiresome MBAs like to say.
Amazon will be experimenting with ads, much like it is experimenting with hardware. Which means AMZN may be out of its depth.
Now, there’s always a chance that the smart people under Jeff Bezos figure this out. After all, Amazon Web Services is a success, and many think it has potential to drive AMZN stock higher long term thanks to the growth in internet services and cloud computing.
But there is no organic tailwind to help the online ad game at Amazon, even if the company manages to snag top talent and innovate with great ad-serving software.
How to Trade AMZN Now
There are too many “what ifs” here with the Amazon ad scene, and not enough bottom-line impact in the next few years to make this anything worth paying attention to.
Thus, my recommendation remains the same as it has been for months: Abandon ship.
AMZN stock is stuck in a tailspin driven by poor profits and poor sentiments.
You have better options than Amazon stock right now, whether it be for a swing-trade in 2014 or a long-term play on an unprofitable business that could monetize successfully down the road.
Read my recent article “5 Reasons to Sell Amazon” for more details.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.