In a previous article, I compared Amazon.com, Inc. (NASDAQ:AMZN) to Walmart Inc (NYSE:WMT). I should have gone further back in history for parallels. Unfortunately for Amazon stock investors, the emergence and possible beginnings of a decline parallel that of Sears Holdings Corp (NASDAQ:SHLD). Currently, Amazon enjoys a high level of growth that few want to challenge. However, given the historical lessons of Sears, and the short-term orientation of AMZN stock, investors should remain wary.
Amazon Stock Investors Will Shrug Off Trump’s Criticism
The short-term thinking that drives Amazon stock drove the stock price downward as President Donald Trump again weighed in on the company. Trump again criticized the company for tax avoidance, use of the U.S. Postal Service and its effect on retail in general. As a result, the stock fell by 4.4% on Wednesday.
I believe Amazon will move on from Trump’s criticism. In fact, the recovery has already begun. I also hold to my prediction that Amazon will choose a location in metro Washington, D.C. for its second headquarters. This proximity to the corridors of political power should smooth over most of the problems it has with politicians and regulators.
Amazon Stockholders Should Avoid Repeating History
The real danger for Amazon stock comes from both the grassroots and from the lessons of history.
Go back 50 years, and Sears stood as the dominant American retailer. Interestingly, Sears built its empire on mail-order retailing, the precursor to e-commerce. Today, few believe Sears will exist for much longer. This stands as a sad end to a company that could have been Amazon had it enjoyed more visionary leadership in the late 20th-century.
I’m not predicting the closure of Amazon in my lifetime. However, I see parallels to Sears in both Amazon’s rise to dominance and the beginnings of its decline.
Like Sears and Walmart in its heyday, we see more complaints about adverse working conditions and poor customer service emerge. An exposé into conditions at Amazon warehouses showed workers were treated “like cattle.” Further, many customers complained during the Christmas shopping season over late deliveries.
Another parallel has emerged with the interest in non-core businesses. These ventures drive much of Amazon’s growth. Sears also felt that way at one time, but it eventually decided that these businesses took the focus off retailing. As a result, both Allstate Corp (NYSE:ALL) and Discover Financial Services (NYSE:DFS) were spun off into separate companies. Time will tell if Amazon Web Services (AWS) or Body Labs someday emerge as spinoffs themselves.
For now, most analysts and investors remain focused on short-term revenue and earnings. The last earnings report showed a 38% increase in sales and a 162% rise in net income. Given these figures, one can see why investors buy Amazon stock at the current price-to-earnings (PE) ratio, which stands above 230.
However, students of history may have a different take. They have seen this movie before, and they know how it will end. In the long run, they may show a willingness to pay 230 times earnings for a sequel that appears like something identical to the original film.
This take on Amazon stock has often placed me at odds with most of my InvestorPlace colleagues. They correctly point out that its impressive growth drives the stock price higher. For this reason, I will not recommend standing in front of the thundering herd of bulls facing those who short AMZN stock. However, I will not join Will Ashworth in calling for a $10,000 per share Amazon stock price either. Instead, I will advise investors to simply stay away.
Concluding Thoughts on Amazon Stock
Investors need to keep the historical lessons of Sears in mind when investing in Amazon stock. Despite the recent attack by President Trump, Amazon has become a growth juggernaut that few want to sell. Moreover, anything can happen when a stock attracts buyers at a triple-digit multiple. This includes Mr. Ashworth’s $10,000-per-share prediction. For that reason, investors should not short AMZN stock.
Still, both the history and strategic decisions of Amazon reflect those of Sears. Now, Amazon has begun seeing the same issues come to light that led to the decline of the one-time retail king. The amazing growth AMZN has enjoyed will remain intact for now. Also, the emerging customer and worker backlash will take years before it materially affects the top and bottom lines. However, investors should take a long-term, historical view before paying 230-times-earnings to experience Sears: The Sequel.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
