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Pros and Cons to Buying Amazon.com, Inc. Stock

Amazon stock buy or sell - Pros and Cons to Buying Amazon.com, Inc. Stock

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Love it or hate it (and most people are at the extreme ends of that spectrum), nobody can deny Amazon.com, Inc. (NASDAQ:AMZN) has been a stunningly rewarding investment over the course of the past 20 years. AMZN stock has gained around 10,000% since its 1997 IPO, despite being barely profitable — relative to its size — for the majority of that time.

Nevertheless, things are forever changing. That’s especially true within the technology world and consumer markets.

With that as the backdrop, here are some things working for and against Amazon in 2018 that all investors would be wise to digest when they’re considering whether Amazon stock is a buy or sell.

In Amazon’s Favor

There’s no sense in ignoring the 800-pound gorilla in the room. So, Amazon Web Services has been and should continue to be a monster-sized breadwinner for the company.

Just to put things in perspective, last quarter, Amazon’s AWS generated $5.4 billion worth of revenue, up 48% from Q1 2017’s top line. That pales in comparison to the $30.7 billion worth of North American e-commerce revenue the company produced during the first quarter, but there’s a huge detail that can’t be ignored.

Last quarter, Amazon Web Services produced $1.4 billion worth of operating income, topping the $1.15 billion in operating profits its North America e-commerce arm netted.

It’s a big milestone, but more than that, it verifies that Amazon is able to maintain its pricing power even as rivals like Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) move to take on more share of the still-growing market.

If nothing else, AWS will provide funding for other projects and acquisitions.

There’s an even bigger, more philosophical reason Amazon’s got an edge that makes AMZN stock a buy, however. That is, Jeff Bezos has perfectly positioned it not as a service provider, but a lifestyle company. You don’t really notice it, but it’s always there.

Case in point: Its Alexa-powered Echo not only plays music and gives you weather reports, it can order food deliveries, restock your laundry room and even call for an Uber. Oh yeah, it also remembers everything you use it for and cross references that with everything you buy online or watch using your Prime account, which becomes an incredible marketing tool.

Most consumers — even regular Amazon users — don’t recognize how much the company knows and how it leverages the information given to it so freely. That’s a big reason the company’s been so successful.

Working Against Amazon

That being said, Amazon isn’t exactly a bulletproof organization. There are some things that could make AMZN stock a sell rather than a buy.

Chief among them is the most obvious one. Amazon.com is a behemoth, but huge companies are difficult to manage well as the people at the top are increasingly separated from the people on the front line that deal directly with customers. Problems are certainly surfacing that top management knows nothing about but probably should.

In that same vein, while Amazon has successfully become a lifestyle company via the development of technologies like the Echo and acquisitions like Whole Foods Market, there does come a time when the sheer complexity of all an organization’s moving parts becomes more of a liability than an asset. We may be at, or at least near, that point now.

There’s also a less touchy-feely reason to worry about Amazon right now as well. It may not actually be as profitable as the touted numbers from its most recent quarterly report suggest.

The simple version of a complicated explanation is that Amazon.com isn’t actually accounting for all of its expenses on its basic cash flow statement.

After factoring in its costs to pay for the equipment needed by AWS and the facilities to house those servers, Amazon actually sports negative cash flow. In fact, its effective cash flow has been getting increasingly negative for a couple years now, reaching -$2.9 billion for the past 12 months as of last quarter.

It’s still GAAP compliant. The approach, however, certainly strains the intent of the GAAP standard. Moreover, it sets the stage for a build-up of liabilities that most investors may not see coming until it’s too late.

As of the most recent SEC filing, Amazon’s got $119.2 billion worth of obligations — mostly lease and purchase obligations — it will have to meet in the future, most of which don’t show up on the balance sheet.

The only way it’s going to be able to pay those obligations is by earning a lot more from its future assets than it’s earning on its current assets.

Bottom Line on Amazon Stock

So has AMZN stock kept its place on the list of the market’s hot stocks to buy? It has, but as always, with a footnote.

That footnote is don’t make any mistake about what Amazon really is. The stock’s growth has been mostly supported by some great storytelling and publicity. No other company would be treated as gently by the market as Amazon has been were it producing Amazon-like results.

Amazon perpetually sports paper-thin profits, and in terms of massive obligations, most investors have chosen to look the other way.

That’s fine. If it works, it works.

No investor can afford to dig in too deep, though, and then turn their back on the stock. This is a high-flying name that’s usually fun to own but always has the potential to run out of runway before it actually takes flight the way investors have been presuming it eventually will for years now.

If and when that day comes and AMZN stock begins being treated like any other equity, yikes.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2018/05/pros-and-cons-to-buying-amazon-stock/.

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