Amazon.com, Inc. (NASDAQ:AMZN) is a regular favorite among tech investors, and for good reason. After bottoming out around $10 a share after the dot-com crash, AMZN stock has raced up to a recent high of about $850 a share before pulling back. Had you got out at the top, that would have turned a $1,000 investment in Amazon stock into $85,000.
Of course, Amazon.com has changed a lot over the past 15 years or so. A decade ago, the story was all about e-commerce and how AMZN was killing traditional retailers. Last year, it was all about the rapid growth of Amazon Web Services. Now, its virtual assistant Alexa is all the rage.
But investors in Amazon stock aren’t buying the past. They are buying the future. And in 2017, with so much growth behind AMZN stock, it’s reasonable to wonder whether it can keep this up.
If you’re wondering whether Amazon stock is a buy or a sell here after its big run, here are three pros and three cons to help you decide.
Pros of Amazon Stock
Innovation: Amazon started with a vision to be the world’s largest bookstore. It then moved into everything from shoes to flat-screen TVs and now touches every part of retail imaginable. After that, it started cranking out its own Kindle hardware and developed its much-hyped cloud computing arm AWS. Nobody knows what’s next from Amazon — drones, perhaps? — but you can be sure this company is not sitting still.
Revenue Growth: With a growth rate of about 28% in fiscal 2016, Amazon’s top line is moving higher at a very nice clip But what’s really amazing is that the base number is already huge — starting the year at over $100 billion! But lest you think AMZN stock can’t keep that rate up, it’s projecting over 20% revenue growth again in 2017 despite starting from roughly $130 billion in annual sales. That’s simply amazing.
The Sky Is the Limit: As of Q3 2016, fewer than 10% of total U.S. retail sales were e-commerce transactions. And while Amazon is dominant among this with a roughly 51% share, there is plenty of room for it to gain a larger piece of the pie even as the pie keeps growing. This, coupled with the company’s ability to branch out into other areas and a will to invest heavily in R&D, means there is literally nothing AMZN stock can’t do in the years ahead.
Cons of Amazon Stock
Profit Challenges: One of the biggest catalysts for AMZN stock in the last year or two has been the profitability of Amazon Web Services, which led to a rare stretch of quarterly profits for the tech giant. However, those profits have started to fade again, and a big earnings miss in September 2016 disappointed investors and has largely held the stock back ever since. Founder and CEO Jeff Bezos wants to plow every penny of profits back into the company, but Wall Street may want something different now that it got a taste for actual earnings.
Risk of Retail Hubris: Amazon stock holders and CEO Jeff Bezos think anything goes at AMZN, but remember the flop that was the Fire Phone? That was a costly boondoggle that ultimately led to the firing of engineers in charge of the project. Right now, Amazon may be making a similar mistake as it jockeys to purchase the defunct American Apparel and opens brick-and-mortar bookstores in New York and elsewhere. Sure, Amazon is dominant … but is it now being unrealistic about where it can compete by entering physical retail?
Unrealistic Expectations: With so much buzz around AWS and Alexa and with such high expectations for its core e-commerce business, it’s natural to think disappointment lies ahead. After all, Amazon Web Services was growing revenue at a 78% rate in Q3 2015 and that fell to a much more modest 55% growth rate in Q3 2016. More is more, yes, but as any momentum investor will tell you it’s all about expectations and not the core growth rate. Amazon investors may have unrealistic expectations after 2016, and it will be difficult even for this fast-growing stock to keep up.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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