AMZN Stock Is a Buy for the Wrong Reasons, But Whatever

It’s official. Investors as well as analysts have perfected their ability to see only what they want to see, superseding common sense whenever the situation is deemed to merit it. Case in point? Amazon (AMZN).

AMZN stock was upgraded by Cowen as well as Wedbush Securities today, for reasons that lack any semblance of logic. But the scary part of the upgrades is how nobody’s disagreeing with the hollow logic., Inc. (NASDAQ:AMZN)

Indeed, Monday’s increase in the AMZN stock price suggests investors are perfectly content to ignore the fact that Amazon is more likely to be incapable of turning a profit rather than just uninterested in turning one.

Cowen Raises AMZN Price Target

Cowen posted the rationale behind the upgrade of AMZN stock this morning. The research outfit now has an AMZN price target of $565 per share, up from a prior target of $435. Cowen upped its official rating on AMZN stock to an “outperform.”

The upgrade and higher target price aren’t terribly dramatic; analysts and investors alike love to love Amazon. The baffling part is the focal point of the rationale. Cowen analyst John Blackledge wrote:

“Amazon is winning in large Retail and Tech markets given long-term investments, per our proprietary data/analysis… We expect Amazon to be the #1 US Apparel retailer by ’17, driven by accelerating purchaser growth, and continue to gain traction in other retail verticals.”

Such growth would displace Macy’s (M) as the nation’s biggest apparel retailer. And realistically speaking, Amazon will likely do what Cowen expects it to do. That’s not in dispute.

What’s not clear is how (or even if) being the country’s biggest retailer necessarily makes AMZN stock worth more. After all, the world’s biggest online retailer has a habit of driving paper-thin margins — and still swinging to the occasional loss — all in the name of the growth, even though the company has been around since 1994.

Indeed, the business model itself is one that relies on taking market share explicitly because the company is willing to accept nil margins, and physical merchandise has never been as profitable as Amazon’s digital segements. After more than two decades in business, Amazon has certainly whittled down its fixed costs to an absolute minimum.

But low-margin physical goods are still the bulk of Amazon’s revenue mix. Selling more shirts and trousers isn’t likely to widen margins as a percentage of revenue, even if the total size of the bottom line scales up.

Wedbush Sees Potential in AWS

In the shadow of Cowen’s upgrade, Wedbush analyst Michael Pachter upped his AMZN price target from $435 to $575, raising his opinion on AMZN stock from “neutral” to “outperform.” The reason? Growth potential and the eventual profits of its Amazon Web Services (AWS) division, as well as growth in revenue stemming from more Amazon Prime memberships in the wake of last week’s Prime Day event.

The growth aspects of each segment are conceded. Where Pachter’s optimism falls short, however, is on the math and reality fronts.

The Wedbush analyst’s note ballparked new revenue of $2 billion (presumably per year) spurred by new customers who signed up for a Prime membership because of Prime Day. At $99 per year, that translates into 20 million new members. It’s not an inconceivable figure, but it’s certainly a lofty one.

Near the end of last year, Re/code estimated there were between 40 million and 50 million Prime members worldwide. While successful, 20 million newcomers would be considered a stunning success for Prime Day, especially in light of the fact that Walmart (WMT) at least partially trumped Prime Day with an online sales event of its own.

As for the profitability of AWS, Pachter’s optimism again may be a little too aggressive.

It is true that Amazon Web Services was profitable last quarter … on an operating basis. In fact, AWS has been profitable on an operational basis for a while, as we can tell now that Amazon is detailing its P&L statements.

But, it’s a “just barely” level of profit, and margins thus far have been shrinking rather than widening as AWS has grown. AWS generated $1.56 billion in revenue during Q1, leading to an operating profit of $265 million for that segment — a 17% margin. In the same quarter of 2014, AWS turned $1.05 billion worth of revenue into an operating profit of $245 million, for a net margin rate of 23%.

It’s a move in the wrong direction. Margins should widen as scale increases. Moreover, as cloud-based services become more and more commoditized and competitive, margins will continue to be pressured lower rather than higher.

And, bear in mind there are still non-operational expenses that must be allocated and deducted from each segment’s separate P&L. While cloud get rather big rather fast for Amazon, its positive impact on per-share earnings of AMZN stock is apt to be miniscule.

Bottom Line for AMZN Stock

This is normally where one would expect to hear the earnings and valuation sermon, discouraging investors from getting anywhere near a very vulnerable AMZN stock that may never show a decent profit. You’re not going to hear that speech, though.

Instead, what you’ll hear is a concession — if investors and analysts don’t care that will never be reasonably profitable (simply because it can’t), then there’s no reason to fight the crowd.

AMZN stock isn’t “worth it” by any stretch of the imagination. It just doesn’t matter. It’s a story stock, or a premise, or a dream. Call it whatever you want. Just don’t call it an investment, because were it any other company putting up the numbers Amazon has or will post, investors would have crucified it.

Welcome to the new world.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Article printed from InvestorPlace Media,

©2023 InvestorPlace Media, LLC