The stock has had a wild ride in the past year, going from a low of $366 in March, 2015 to a high of $693 this past December. Since then, the stock has cooled back down to $534.90.
The company is an e-commerce giant, with a relentless focus on lower cost structure and passing the savings to its customers. Amazon is also extremely conscientious about fulfillment center and overall operations efficiency. Yet, Amazon stock is up more than 1,400% in the past decade. If the profitability and revenue growth can’t keep up with this breakneck appreciation, the stock price must come down.
The general market also puts downward pressure on the stock. With the recent correction, the entire market has been under pressure, but a sinking tide lowers all ships.
With large companies, such as Amazon, Google, and Apple, it becomes increasingly difficult to sustain high levels of growth. Going from $100 million in revenue to $1 billion is more doable than going from $10 billion to $100 billion. As a company grows and saturates its respective market, growth slows.
Tech stocks are promoted with enthusiasm on Wall Street in the face of unrealistic valuations and poor earnings. Sure, the stock can go to moon, but it will eventually crash back to Earth. Amazon’s P/E is sky-high at over 400.
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Amazon doesn’t pay a dividend, which means that investors don’t even get paid for owning the stock. It doesn’t pay a dividend because it reinvests profits back into the company, but perhaps the money would be better used in the hands of investors.
After all, Amazon Instant Video is a disaster and Kindles have lost their edge. On the other hand, Amazon is improving its delivery services. Its Prime two-day shipping service has experienced over 50% growth in membership and Prime Now, which can deliver within an hour in major cities, is another big project.
In the short-term, Amazon stock rose. Amazon Web Services (AWS) was more profitable than investors expected, and it gave them hope that the company will continue to grow. One must remember that e-commerce comprises only 10% of global retail sales, so there is a tremendous opportunity for Amazon to pursue aggressive international expansion.
Amazon is a remarkable company, and Jeff Bezos is an extraordinary leader who sacrifices short-term benefits for long-term success. He has a passion for serving customers and stays true to Amazon’s customer-centric business model. Because of his passion, Amazon has engraved its position as the place with widest selection and low prices across many categories. It has secured first place in the e-commerce megatrend, beating out large brick-and-mortar competitors like Wal-Mart and Macy’s.
I believe that Jeff Bezos’ leadership will allow Amazon to experience more of the success it has experience over the years. As long as the company keeps investing in itself and focuses on the customer, it should do fine in any financial environment.
Here’s a fun fact for you: Wal-Mart took 18 years to reach $1 billion in sales. Amazon reached $95 billion in 18 years. That’s 95X more than Wal-Mart, one of the best stock market success stories in history.
What do I think? I think that short-term, Amazon is a horrible investment. If you buy in now and hold for the long-term, you should be fine, but the downside risk is just too much for me right now. I’ll sit this one out.