Amazon.com, Inc.: This FANG Stock Still Looks Scary (AMZN)

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Amazon - Amazon.com, Inc.: This FANG Stock Still Looks Scary (AMZN)

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Nothing lasts forever … and this is especially true on Wall Street. A stark example of this is the dumping of the seemingly invincible FANG stocks, which include Facebook Inc (FB), Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX) and Alphabet Inc (GOOG, GOOGL).

Amazon.com, Inc.: This FANG Stock Still Looks Scary (AMZN)It seems that investors are moving away from growth to value plays — but are also getting more focused on the bottom line.

Now, this does not mean FANG is dead. Let’s face it, the group includes outstanding operators. Yet, there is likely to be much more volatility.

What’s more, there is one member of FANG that could really feel the pain for some time: Amazon stock.

Why? Well, it looks like the company is planning to ramp up expenditures in a big way. No doubt, as seen in the past, this has been something that has spooked investors in AMZN stock.

What’s Weighting on AMZN Stock?

To be more specific, the main issue is the fulfillment costs, which spiked 33% to $4.55 billion in Q4. This is compared to a 22% increase in net sales. On the news, Amazon stock tanked.

But when drilling down on the numbers, there was something else that was disconcerting — that is, the net shipping costs, which AMZN must pay after factoring in what customers have been billed. In the latest quarter, these expenses came to $1.85 billion, which was a record high.

There are several factors for the continued exorbitant fulfillment and net shipping costs. For example, Prime membership encourages more customer activity, but the annual fee is a really a modest $99 (there hasn’t been an increase in the past two years).

But there is also the challenge of fulfilling orders for third-party sellers on the Amazon site.

Oh, and of course, the company must deal with transportation service providers like the United States Postal Service, United Postal Service, Inc. (UPS) and FedEx Corporation (FDX).

What to do?

Interestingly enough, AMZN appears to be planning to create its own transportation system! Granted, this may ultimately lower costs, but this will probably take a few years. In the meantime, there will be huge outlays – such as for putting together a fleet of aircraft and even ocean freighters — and it’s a good bet that UPS and FDX will take actions to fight back, perhaps along with companies like Uber. For the most part, this should be scary news for investors in Amazon stock.

Based on a recent post in Bloomberg.com, it actually looks like AMZN’s plan may be even more ambitious. Known as “Dragon Boat,” the focus will be on developing a global platform that will provide for cross-border ecommerce. In other words, the target is on Alibaba Group Holding Ltd (BABA).

According to Bloomberg.com: “With a few finger taps on their smartphones, merchants in China will summon Amazon trucks to pick up products from their factories and warehouses … Once the shipments reach their destination ports, they will be plugged directly into Amazon’s distribution networks for speedy home delivery.”

OK, so what are the costs of building such a platform? What about the risks of failure?

It’s impossible to tell. But it seems like a good bet that profits will likely be muted for some time, which could weigh on AMZN stock.

Furthermore, Alibaba is already developing its own logistics system and already has a big head start when it comes to global cross-border ecommerce. In other words, expect a brutal fight, which will definitely drive up the costs.

Bottom Line on Amazon Stock

In light of all the heavy investments, it should be no surprise that AMZN had a disappointing Q4. The company posted earnings of $1 per share, while the Street was expecting $1.56 per share. Even the robust cloud business was not able to make up for the shortfall.

All in all, the margins will probably be fairly meager for the long haul. In fact, despite the recent drop in AMZN stock, the forward price-to-earnings ratio is still at a steep 56X. By comparison, Facebook is at 24X and Alphabet’s is at 17X.

To sum things up: Why pay a premium valuation for Amazon stock when you can get another top-tier tech play — especially FB — that has a stronger growth ramp and does not have the risks of building a massive brick-and-mortar logistics system?

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.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/amazon-this-fang-stock-still-looks-scary/.

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