Amazon.com, Inc. (AMZN) is one of the most recognizable names of the tech sector, and considered by many as the godfather of e-commerce as we know it.
But despite the brand power of Amazon.com, shares haven’t been kind to AMZN stock investors — and the reputation of this once fast-growing tech company could be forever tarnished by recent declines.
Year-to-date, Amazon stock is down more than 20% vs. a gain of about 8% for the overall stock market in the same period. Yes, this comes after many years of breakneck appreciation for AMZN stock, with the Internet retailer up about 700% in the last decade … but in the “what have you done for me lately?” world of Wall Street, it’s hard to overlook the recent troubles simply because of past successes.
And sadly for AMZN stock holders, a spate of recent headlines indicate that the underperformance of Amazon.com, Inc. could persist in 2015 — and perhaps even longer.
Here’s why investors may want to sell Amazon stock in the new year:
Lack of Profits: The biggest reason for underperformance in Amazon lately has been the fact that CEO Jeff Bezos has plowed all the extra money created by e-commerce into low-margin efforts elsewhere. In fact, AMZN will finish fiscal 2014 with a quarterly loss after recent Amazon earnings showed a quarterly loss of 95 cents a share. And even though Wall Street predicts that Amazon will return to profitability next year, remember that many analysts didn’t predict this kind of cash bleed in 2014 … so there’s no guarantee. Furthermore, projected earnings for 2015 still are below 2011 numbers by a considerable margin. Not good for Amazon stock holders who have been depending on AMZN to turn its top-line power into bottom-line potential.
Hare-Brained Hardware: Specific to the bottom-line drag is a strategic misstep by CEO Jeff Bezos via a focus on Amazon-branded hardware and consumer electronics. A precious few companies can figure out how to make significant profits on consumer electronics hardware; consider that Apple Inc. (AAPL) and Samsung (SSNLF) account for the entirety of smartphone profits among every device manufacturer in the space. Still, Amazon naively moved ahead with its ill-advised Fire Phone, which some have called the biggest tech flop of 2014. While the Fire Phone is behind AMZN stock holders, the problem is that Amazon still is making a clear consumer tech push via the Fire TV set-top box and the Fire Stick — not to mention its odd “smart speaker” called Echo that is designed to respond to voice commands. The idea is that Amazon can make its content ecosystem indispensable to consumers this way … but how long will investors continue to endorse Bezos & Co. subsidizing hardware that is breakeven at best? Remember, Amazon.com has been selling its Kindle Fire tablet at cost for years now — and refuses to break out unit sales or revenue (probably because it’s scared of how investors will react). That’s not encouraging for the future of this company’s profitability.
Ill-Advised Spending: It’s not just low-margin hardware that ensures the lack of profitability will persist at AMZN stock. Consider that Amazon.com dropped $1 billion on video game live-streaming company Twitch recently. Why? Simply to feed content to its online video archive at some distant point in the future? Also, Amazon is launching an online advertising platform that is meant to compete with heavyweight Google Inc (GOOG) — spending big bucks on an industry where other companies are entrenched, and where Amazon doesn’t have much in-house talent to get up to speed quickly. Amazon is notoriously tight-lipped on any financial metrics, but its “technology and content” line item continues to move steadily higher — tallying a net $2.4 billion last quarter, up from $1.7 billion the year before and double the $1.2 billion spent in 2012. Clearly, Amazon stock is not taking its foot off the gas here, meaning the pressure on profits will continue in 2015.
Prime Video Is Perplexing: I have written pretty extensively about my confusion with the big cost commitment and minimal impact of Amazon building out an ambitious Instant Video service for its Amazon Prime subscription service. For starters, consider how far behind it is, with a recent analysis from Sandvine showing Netflix, Inc. (NFLX) dominates about one-third of total Internet traffic during peak hours … while Amazon Prime Instant Video saw its share at 2.58% as of September 2014. Fighting head-to-head with Netflix to win market share, considering Amazon’s current profit pressures and just how far behind it is, seems pretty darn naive. Furthermore, a recent survey of 1,000 consumers shows that a mere 13% consider video the most important reason for subscribing to Amazon Prime. So why keep spending big on new content, from original shows that could cost over $100 million, to the latest hot TV series? It’s just one more drag on the bottom line.
Consumer Perception Problems: While consumers have long been a fan of the low prices they can get on Amazon, increasingly there has been a focus on just how poorly treated Amazon workers are. Consider the recent strike by German workers as well as a New Republic story that Amazon is “cannibalizing” the economy and is acting like a monopoly. That kind of brand tarnish can have an impact on consumers and merchants alike, and investors shouldn’t discount the power of a small change in wages or in demand trends as a catalyst for even more pain on the bottom line for this stock right now.
Investor Perception Problems: Worse, investors have abandoned ship as Amazon has rolled over. Amazon stock has tried to fight back a few times across 2014, but always is punctuated by another decline on poor earnings or other news. We’ve seen this time and time again in tech stocks — a great growth story is powered by enthusiasm on Wall Street, even in the face of unrealistic valuations and a few problems lurking just below the surface. It rides on sentiment … until it doesn’t, then crashes back to earth. What with AMZN still sporting a forward price-to-earnings ratio in the triple-digits, it’s highly unlikely that the narrative of burned investors scoffing at unrealistic expectations will be replaced by true believers in 2015. Remember: Back in the spring, Amazon stock 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 about $1! Sentiment matters in a stock like Amazon, and sentiment stinks right now.
Bezos Doesn’t Care About You: Despite the corporate structure of AMZN stock, Amazon.com is clearly operating as a nonprofit right now. Also, Jeff Bezos has made clear that he doesn’t manage the company quarter-to-quarter but is only interested in the long-term — and more specifically, his vision of the long-term. If you believe that this strong-willed CEO has all the right answers, then by all means keep believing in AMZN stock. But if you doubt that Amazon.com is perfectly positioned, it’s naive to expect anyone else to bend the arc of this company away from Bezos’ singular vision. As many biographical articles have revealed, this isn’t a CEO who cares much for outside viewpoints — from investors or anyone else.
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 protected] or follow him on Twitter via @JeffReevesIP.