It’s that time of year again. We’re about halfway into 2015 and Amazon (AMZN) is on a downright tear. Shares of Amazon stock have soared more than 35% since the year kicked off, making the broader market’s 2% climb look downright shameful.
That only means one thing: It’s time for our annual reminder about what it really means to invest in Amazon stock.
To start, though, let’s back up. Most novice investors (myself included) have learned the hard way that what I like to call the “anecdotal investment thesis” is a recipe for failure. The logic of such investments usually goes a little something like: I use X product a lot, which is sold by Y company, therefore Y company must be a good investment.
A more specific example is spotting the never-ending lines at Chipotle (CMG) or Starbucks (SBUX) and assuming that each company is therefore a smart investment, or noting that all your friends seem to be using Amazon to buy … well, everything — and deciding to therefore snag some shares.
Really, such observations should be a starting point for further research — namely, a dive into the fundamentals.
Amazon Charges Higher Despite Fundamentals
Earnings results and growth are one key component of this further digging, but lately I’ve been reading and talking to my friends about how many other components must be considered when analyzing the health of the company and the potential for an investment.
(Seriously — a good friend of mine recently had a texting conversation that transitioned seamlessly from analyzing the Cleveland Cavaliers’ back court to evaluating ROA and back again.)
A company’s balance sheet, for example, is far harder to manipulate and far more reliable to analyze than a company’s quarterly earnings results. Quarterly results can fall victim to accounting tricks and the good ol’ expectations game, and should be instead used to determine a company’s fair valuation once you establish its business is sound.
Except, of course, when it comes to Amazon stock.
For years, shares of AMZN stock have been trading on anything but fundamentals: How else could a forward P/E of 160, a PEG ratio of more than 32, a negative return on equity and an average of -13% annual earnings growth over the last half decade produce a 35% year-to-date climb?
At the beginning of 2014, we finally started to eat the narrative that investors were tired of Amazon not being consistently profitable, and shares of AMZN stock sank almost 22% over the course of the year. The valuation had finally become unsustainable, we all said. Investors were tired of the all-potential, no-profits storyline.
Or so we thought. So far this year, AMZN stock has recovered to new all-time highs, in two downright enormous momentum up-gaps. And it did so on a year-over-year earnings drop for the fourth quarter of 2014 and then the return to an earnings loss for the first quarter of 2015 — despite the fact that its year-ago comparison was in the black!
Sure, the current quarter’s results are at least moving in the right direction, with analysts recently shaving a penny of the projected loss, which puts the expected results at about 11 cents less than last year’s loss for the same period. And sure, Amazon is expected to end in the black for the full-year, with analysts expected 2015 EPS to tally 38 cents per share vs. last year’s in-the-red tally of 52 cents.
But a projection for earnings hardly means those results will actually come — and hardly brings Amazon stock anywhere near the real world of fundamentals. Instead, shares of AMZN stock indeed trade on fluffy factors like anecdotal evidence, big-time long-term potential, and the sentiment of both institutional investors (who own almost 70% of the outstanding float) and the kool-aid-drinking wave-riding masses.
Keep that headscratching reality in mind if you’re looking to hop into Amazon stock at this stage in the upswing.
Alyssa Oursler is based in San Francisco and writes about technology, investing, gender and entrepreneurship. Her work has appeared on Business Insider, MSN Money and more. You can follow her on Twitter here or check out her personal site here. As of this writing, she did not hold a position in any of the aforementioned securities.