Amazon.com, Inc. (AMZN) is a publicly traded company, and an e-commerce giant that’s expected to do nearly $90 billion in sales this year.
But despite the very corporate structure of AMZN stock, Amazon.com is absurdly operating as a nonprofit right now. Amazon earnings showed a quarterly loss of 95 cents a share, driven by low margins on many products and aggressive investment in others that haven’t paid off yet.
As a result, AMZN stock isn’t doing so well, with shares of Amazon down more than 20% in 2014.
The million-dollar question for investors, then, is whether the cash burn at Amazon will correct itself and the company will start posting any improvement on the bottom line soon enough to change negative sentiment around this company.
Personally, I don’t think that’s likely.
Amazon.com, Inc. and Its Hare-Brained Hardware
The biggest reason to be bearish about AMZN stock is the hubris of CEO Jeff Bezos when it comes to Amazon-branded hardware.
A precious few companies can figure out how to make significant profits on consumer electronics hardware. Consider the fact that Apple Inc. (AAPL) and Samsung (SSNLF) account for the entirety of smartphone profits among every device manufacturer in the space.
So what in the world was Amazon thinking with its ill-advised Fire Phone, which some have called the biggest tech flop of 2014 and others claim is stacked so high in AMZN stock warehouses that the e-commerce giant has some $83 million in unsold inventory sitting around?
If that dud of a product wasn’t bad enough, we saw Amazon also double down on its desire to offer a streaming video widget, creating a $39 Fire TV stick similar to the Chromecast from Google (GOOG) in addition to its $99 Fire TV set-top box that is similar to Roku or Apple TV devices. The Fire TV box was a big initial disappointment, and even though the cheaper Fire stick appears to be sold out (keep in mind that the launch included a special $19 introductory price to Amazon Prime members; there’s not a whole lot of profit here).
Furthermore, doesn’t a TV-sales giant like Amazon know that the next generation of smart TVs are already coming loaded with streaming video apps? Is this kind of plug-in device really a long-term growth plan, or just a stopgap between old flatscreens and the new era of streaming-enabled sets?
The icing on the cake is a “smart speaker” called Echo that is designed to respond to voice commands. Because if you can’t succeed in streaming video, why not take on streaming audio, too?
Jeff Bezos and AMZN are mighty secretive about device sales and profitability, so investors have little visibility here beyond our best guesses. But remember, Bezos famously confirmed in 2012 that the Fire tablet was being sold at cost in a desire to achieve market share — and based on these recent gadgets, you can be very confident that new hardware offerings from Amazon.com offer similarly thin margins.
That’s not going to cut it at a company that is currently struggling to break even, and whose investors are demanding something different from AMZN stock instead of more of the same.
Expect AMZN Stock to Underperform
Now, there is a chance that Amazon’s big burn on new products will pay off or that it will continue to grow its revenue impressively enough to warrant optimism on Wall Street.
But that’s a big risk to take considering that on top of hardware hijinks, AMZN dropped $1 billion on video game live-streaming company Twitch and is launching an online advertising platform that is meant to compete with heavyweight Google.
What a waste.
One of the few bright spots that the Amazon bulls point to is the Amazon Prime service, which offers a ton of ready cash at $99 a year and as many as 50 million members according to one rosy estimate … but Wall Street analysts over at Bernstein Research offered up a fascinating critique of Amazon Prime with the title, “Amazon: Is Prime Instant Video a Total Waste of Money?”
In the research piece, published at the beginning of October, Carlos Kirjner and Peter Paskhaver of Bernstein share the results of a survey that showed a mere 13% of Prime users who joined in the last year did so because of video.
Why pay all that cash on original content, on the acquisition of Twitch and the general maintenance of a streaming business that doesn’t seem to be a priority for your customers?
Why stray from the e-commerce model that made AMZN a force to be reckoned with?
And most importantly, why is it that Amazon.com cares so little for profits in the face of continued challenges?
Given all this, it seems impossible for Amazon stock to move ahead in 2015. Back in the spring, Amazon was trading at a huge forward price-to-earnings ratio of over 90. That was based on projections of about $4.24 in earnings per share for fiscal 2015 at the time … and now that forecast has shrunk to a consensus forecast of less than $1, giving AMZN stock a forward P/E of over 300!
If the stock could continue to slump with a forward earnings multiple of about 90, now that it’s more than three times that, it should be a big warning sign for AMZN stock investors.
Amazon is run as a nonprofit, and will continue to be a nonprofit for investors as long as the company keeps this up.
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 editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
