Last week shares of Amazon.com Inc. (NASDAQ:AMZN) went wild, again, jumping more than 15% after posting impressive quarterly earnings. A massive move like that always draws attention from the media and investors.
Since going public, Amazon stock has crushed the market, outpacing the S&P 500 by more than 28,000% since 1997, more than 1,100% over the past 10 years, by 150% over the past five years and 35% over the past year. That is the kind of performance that dreams are made of.
While no one can accurately predict the future, what we can do is look at the information we have now to help make a more accurate guess at what the future holds.
Let’s take a look at the pros and cons of buying Amazon stock.
3 Pros for Amazon Stock
Increasing revenue: Amazon is a consistent revenue star, increasing its revenue by 14% in 2014. In its most recent quarterly report, revenue was up 15% compared to the same quarter a year ago. Amazon continues to be a leader in the online marketplace despite other companies focusing more on online sales. The world of online shopping has grown rapidly but Amazon has maintained its top spot. Furthermore, AMZN’s other business such as Amazon Web Services also continue to show strength — revenue from that division rose 50% in the most recent quarter and is on pace to hit $6 billion in 2015.
Long-term planning: Amazon thinks about the long term and keeps reinvesting its earnings into its business. Amazon spends billions each year building new warehouses, systems, robots and now drones; all to help make the customer experience easier, faster and more seamless. AMZN believes tomorrow can be better than today, but only if continual innovation and investment in the future is maintained. Amazon has been able to go from an online bookstore being operated out of Jeff Bezos’s garage to a $200 billion company in 22 years because it reinvests in the busines.
Leadership: Amazon.com has one of the best business leaders in the world. For most investors, Jeff Bezos would make their short list of “Best CEOs of All Time.” Bezos has the visionary mindset, the knowledge and leadership skills to accomplish those visions (no matter how crazy they may seem at first glance), and the discipline to stay on course regardless of the pressure from outsiders (Wall Street and other investors). All of the great business leaders have a few traits in common: a drive to be the best at what they do, long-term thinking and they change the world with the products and services they offer. Bezos clearly demonstrates all three of these traits.
3 Cons for Amazon Stock
Inconsistent profit: Amazon has been in existence since 1994 and still does not regularly show a profit. The company has at times posted quarterly or even yearly profits, but for the most part Amazon continues to spend more money than it makes. Last week’s quarterly report showed that Amazon had a net loss of $57 million, or 12 cents per share, due to heavy spending. That compared to a profit of 23 cents per share for the same quarter a year ago. Amazon stock is trading at $432, giving the company a market capitalization of more than $200 billion, but the business doesn’t regularly turn a profit.
Crazy valuation: To me a company’s valuation is based on earnings and earnings alone. Investors can compare the ratio of price to earnings before interest, taxes, depreciation, and amortization (EBITDA), price-to-sales, price-to-book or whatever, but at the end of the day the only thing that matters to me is earnings. So even before Amazon stock popped 15% last Friday, the stock carried a ridiculous valuation — so crazy we can’t even talk about the company’s P/E because it doesn’t have one. Currently Amazon stock is trading at 2.3 times sales, which is not terrible when compared to other stocks. Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL), trades at 5.8, Facebook Inc (NASDAQ:FB) trades at 16 and Apple Inc. (NASDAQ:AAPL) trades at 3.8, but all of those companies at least post positive earnings on a regular basis.
Diverse to an extreme: Amazon may have its hands in too many cookie jars. While Amazon Web Services appears to be a great add-on business, other diversity strategies seem as they could be hurting Amazon stock. For instance, Amazon’s streaming video service offered to Amazon Prime members doesn’t seem to be adding value. While Amazon Prime itself is great since it draws in customers with free shipping to entice them to shop Amazon more than other sites, adding the streaming component to the Prime service veers from the company’s course. Sure, the streaming component is a benefit to a customer who buys Amazon Prime, but competition in the video streaming realm is fierce and content is expensive. The return on investment from purchasing the rights to this content seems way too low to justify the service. The capital spent on the content could certainly be used in better ways. As a shareholder of Amazon stock, I would rather Jeff Bezos and his team working on having drones deliver my package same-day rather than what content to purchase for streaming video, (leave that up to Reed Hastings and the team at Netflix, Inc. (NASDAQ:NFLX).
Amazon Stock Verdict
Amazon continues to innovate, increase revenues and make itself stronger. Sometime down the road patient investors will be rewarded in one form or another.
I have been an AMZN shareholder for years and plan to remain one because I believe in long-term investing. And I know and fully understand that in the next six to 12 months Amazon stock could take a nose dive. That is just part of owning Amazon stock — and if you can’t stomach those swings or you want a short-term holding, than Amazon is not the right company for you.
But for long-term investors, buying Amazon stock even at today’s valuation will pay off in the long run.
As of this writing, Matt Thalman is long AMZN, FB, AAPL and GOOG stock. Follow him on Twitter at @mthalman5513.