Like most U.S. consumers, I am a huge fan of Amazon.com (NASDAQ: AMZN), as shown by the frequent visits to my house by the company’s white delivery vans during the holiday season. Amazon stock, though, makes me nervous.
With a trailing price-earnings multiple of 87, Amazon stock trades at a huge premium to its rivals in the retail space and its largest competitors in the cloud-computing sector.
Amazon’s closest rival in the media space is Netflix (NASDAQ: NFLX), which sports a trailing multiple of 96. Analysts, though, on average are forecasting that the revenue of the streaming service/content creator will jump 35% in 2018 and 26% next year. For Amazon, analysts on average predict lower growth of 31% in 2018 and 20% next year.
In a recent note to investors, Cowen analyst John Blackledge predicted that AMZN ‘s compound annual revenue growth would slow to 17% over the next five years. Most Fortune 500 companies would be pleased by that number, but AMZN isn’t like most other companies.
Amazon Stock Has Surged in 2018
Amazon stock has been on a tear this year, surging about 43%, which is a staggering achievement in the current volatile market. Remember, the S&P 500 has barely budged this year. AMZN stock currently trades at a 27 % discount to the average 52-week price target of Wall Street analysts of $2,136. Again, that’s good, but Netflix stock is trading 44% below analysts’ average price target. Netflix stock has already risen 27% in 2018.
Moreover, AMZN has to jump through a lot of hoops in order to meet Wall Street’s sky-high expectations. For example, Blackledge expects AWS to grow at a 31% compound annual growth rate between 2019 and 2024. It isn’t clear if Blackledge is assuming that AMZN will win the Pentagon’s 10-year, $10 billion cloud contract that’s expected to be awarded next year.
Owners of Amazon stock and the rest of the Street are very interested in Amazon’s Prime memberships tally, since people who pay for the service spend roughly four times more on the site than those who don’t.
Analysts expect the company to report that it has 107 million Prime members early next year. Investors also will be keen to learn about the company’s plans for physical stores and its grocery business.
Given the company’s multiple endeavors, it will become increasingly difficult for AMZN to fire on all cylinders. The slightest hint of negativity will cause Amazon to crater.
I am not saying that the party is over for the Seattle-based company, but the risks of owning AMZN stock are greater than many investors may realize.
NFLX, by contrast, has only one business which it understands very well. Netflix stock definitely has its share of challenges. However, I think it’s a better bet for risk-tolerant investors than AMZN stock.
As of this writing, the author did not own shares of any of the companies mentioned.
