Amazon.com, Inc. (NASDAQ:AMZN) seems unstoppable. This is also one of the biggest problems for AMZN stock. When everyone is in, there is no upside left. Of the 43 analysts now covering Amazon, 33 have it rated as a buy and none have it lower than a hold.
But the expectations attached to these recommendations are what should give Amazon bulls pause. Most analysts expect sharp acceleration of earnings this year, far beyond what the company has delivered so far, with estimates as high as $17.43 per share in 2018.
AMZN is a company which, until recently, never made any money, instead being obsessed with plowing every dollar it could find into growth opportunities.
Even after closing the books on 2016 — net income of $2.371 billion, or $4.90 per share on revenue of $135.987 billion — Amazon’s profitability still trails that of Wal-Mart Stores Inc (NYSE:WMT), which earned $3.034 billion, or 98 cents per share, on revenue of $118.790 billion in the October quarter alone.
The super-bullish stance on Amazon stock is based on the idea that, despite its growth, it still has a long way to grow, and that it will soon extract margins the retail industry has never seen.
Forget stopping Amazon, though. But, can anyone hope to contain it?
Eye-Popping Numbers
At its Feb. 13 opening price just below $832 per share, Amazon stock is selling at 168 times 2016 earnings. Its market cap of $402 billion represents approximately three times its sales, which is an absurd number for a company that is still, at heart, a retailer. Most retail market caps are a fraction of revenue.
But of course, the bulls respond, Amazon isn’t really a retailer. Indeed, AMZN is the leading cloud provider, a front-runner in artificial intelligence with Alexa, and is the first “over the top” video provider to gain Oscar buzz. All elements of its logistics are for sale, including payments, deliveries and everything in between.
Wherever you look with Amazon, you see eye-popping numbers. It’s not just an American growth story anymore, it’s a global one.
What Can Slow Amazon
Amazon doesn’t have to be stopped for AMZN stock to suffer. Any sign of a slowdown could cut its value by half, or perhaps even more.
Jeff Bezos has been honest about what could happen. He is worried about “trade and protectionist measures” from the new Administration, and he is fiercely opposed to the Administration’s recent orders on immigration.
Political risks may have moved Bezos to buy a $23 million house in Washington D.C. — and politics costs money. However, those political risks are not just American and they are not just physical. A Balkanization of the Internet — the requirement that local data only be used locally, and that citizens of each country read or see only what leaders want — could prove costly to implement. But, it’s already happening in the world of books.
Despite efforts to control costs by owning its own logistics, delivery costs remain a concern.
Is it Really Good to Be the King?
Amazon may be King, but the crown hangs heavy. AMZN managers know that competitors are catching up in the cloud space, Alphabet Inc. (NASDAQ:GOOGL) is challenging Alexa and has the capital to beat it in the cloud, and Amazon’s success with tablets has the potential to threaten Apple Inc. (NASDAQ:AAPL).
No tree grows to the sky, and likewise, no business can conquer the whole world of technology, media and retail. Amazon has a host of challengers wherever its managers look, and its ambitions are also facing political resistance.
Does this mean I’m selling out of Amazon stock and predicting a crash? No. But, when everyone’s telling you to buy something, that’s actually when you should start to worry, and I’ve started to worry about Amazon.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, AAPL and GOOGL.
