If you’re a world history buff, you’ll probably know the story of how the Roman Empire, once mighty and dominant, overextended itself and eventually went into a well-documented decline. I see the same trajectory for Amazon (NASDAQ:AMZN) stock, which represents a company that has gotten too ambitious for its own good.
To be truthful, I never thought that Amazon stock deserved to be $2,000; the market seems to agree with my assessment, as it has pulled the AMZN stock price back from that level multiple times. Sure, it could attain the $2,000 level again this year, but I’m envisioning more downside than upside for a company and a stock that’s struggling in nosebleed territory.
AMZN Stock Valuation Is Still Too High
As a value-oriented and staunchly contrarian investor, it’s hard for me to swallow the idea of buying expensive assets irrespective of the health of the company they’re supposed to represent. Amazon stock has been the poster boy for high price-to-earnings ratios for a while now: the stock’s triple-digit P/E ratio has continued to confound Warren Buffett-schooled value investors for the past five years.
In other words, the “momo” (momentum) traders have had the upper hand for a long time, buying Amazon shares and watching it march higher regardless of the lofty price tag. However, we’re finally starting to see the bubble deflate somewhat as AMZN stock’s P/E ratio has recently pulled back to around 73 — a short-term low for this high flyer.
If this trend continues, I wouldn’t be averse to the idea of grabbing and holding a few shares of AMZN stock; we’re still not at that point yet, though, as I’d like to see the share price come a little bit closer to Earth before making a buy recommendation.
Amazon Can’t Control Its Third-party Sellers
Independent sellers who hawk their retail wares on Amazon, known as third-party sellers, are the heart of Amazon: the company couldn’t exist without them, and vice versa. I would even venture to say that Amazon’s vast network of third-party retailers are what catapulted the company from a tiny online bookseller to America’s biggest marketplace.
The dark side of Amazon’s arrangement with third-party sellers has recently attracted media attention, however; it seems that this business model has created a Wild West in which a few bad apples can spoil the bunch (or at least, at few bad actors can ruin some customers’ shopping experience). Reports have emerged revealing over 4,000 items (and I’m sure the actual number is much higher than that) which were identified as counterfeit, mislabeled, banned, or even unsafe.
It took a long time, but Amazon finally admitted in a 10-K annual SEC filing that its platform could face liability risks arising from counterfeit items sold through the Amazon marketplace. Yet the company continues to disclaim any and all liability, hiding behind a 1996 law which suggests (more or less) that an online platform like Amazon is nothing more than a “publisher” of content that’s owned, and therefore the responsibility of, third parties.
If you’d like to read the language of the law itself, the Communications Decency Act of 1996, Section 230, states as follows:
No provider… of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.
This strikes me as a legal shield that’s full of gaping holes. I’m not the only one with this opinion: two federal appeals courts and a number of other courts have ruled that Amazon is, in fact, liable for the misdeeds of its third-party vendors. In the most recent instance of this, Circuit Judge Jane Richards Roth of Philadelphia’s 3rd U.S. Circuit Court of Appeals determined:
[Amazon] enables third-party vendors to conceal themselves from the customer, leaving customers injured by defective products with no direct recourse to the third-party vendor.
Amazon took a piece of the action from $160 billion in third-party sales transactions in 2018 on their platform, and I expect the figure to be higher for 2019. However, unless the company can control its vendors — not an easy thing to do without severely restricting its current business model — I expect more legal problems for Amazon going forward.
The Takeaway on Amazon Stock
To be 100% honest with you, I can’t argue with Amazon’s market penetration: everybody and their grandmother uses the platform nowadays. And that’s the problem, as Amazon will have to perform a miracle — something truly innovative and daring, and remarkably successful — to get much bigger than it already is.
As I see it, the same could be said about the AMZN stock price: to get much higher than $2,000, something incredible will have to happen. Until then, I’ll sit happily on the sidelines.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
