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Amazon — Time for Investors To Move On?

Written by on July 28, 2014

A 20-year-old company that has hardly ever returned profits consistently would normally have its stock pummeled by sellers. But not so with Amazon.com, Inc. (NASDAQ:AMZN), which continues to enjoy support from investors and exorbitant P/E ratios (more than 851 as of Friday’s closing) that put it in a league of its own.

Disappointing Quarterly Results

The latest quarterly results were disappointing as Amazon came up with quarterly losses of more than $100 million on sales of more than $20 billion in the 2Q2014. If a business cannot be profitable with an annual turnover of more than $70 billion (in 2013) — which would rise to about $80 billion in FY2014 — then surely there is some underlying problem with the business model of that company.

The company has issued guidance that it will make even more losses in the current quarter — anywhere from $410 million to $810 million.

Amazon’s disappointing performance stands in sharp contrast to many other companies.

Compare Amazon with Microsoft Corporation (NASDAQ:MSFT). While Amazon stock has grown 58% in the past 10 years (and it has a P/E ratio of 16.91), Amazon stock has appreciated by over 700%. Microsoft has been a consistent dividend payer while Amazon is not.

Microsoft raked in more than $21 billion in net income in 2013 on revenues of $77.85 billion. Amazon’s net income of $274 million on revenues of $74.45 billion in 2013 really looks paltry in comparison.

Compare Amazon with Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL). While Google stock has grown more than 1000% in the past 10 years, it still has a reasonable P/E of 30.32.

Google’s net income was $12.92 billion on revenues of nearly $60 billion in 2013.

The Amazon Skeptics

For how long can the Amazon stock continue to remain attractive as a growth stock without any underlying profits from its business? Jeff Bezos has never been focused on “short term profits” but rather on long-term business. To that end, Amazon is now a player in everything from selling books to delivering groceries and from king ebook readers to now making pricey smartphones.

Now Amazon is also involved in the risky and unpredictable business of producing original content. As Netflix, Inc. (NASDAQ:NFLX) knows very well, producing content is an expensive proposition and takes investments running into billions of dollars.

So the Amazon skeptics wonder: what is Amazon and what does it aspire to be and who does it want to compete with?

One-Stop Shop?

Is Amazon competing with Wal-Mart Stores, Inc. (NYSE:WMT) or Apple Inc. (NASDAQ:AAPL) or Netflix?

In retailing, Wal-Mart has a massive leg-up on Amazon and a much bigger and wider presence in the U.S. and around the world. If Amazon can deliver cheap products, so can Wal-Mart.

Smartphone Maker?

In high-end smartphones, Apple remains the consumer favorite both in the U.S. and around the world. Nobody has managed to challenge the Apple profit machine when it comes to making huge profits by selling expensive handsets and Amazon is neither likely to challenge Apple on Apple’s core business or core strength. Indeed, Amazon is not even trying as its handset is designed to make the process of buying/ordering goods from the Amazon web store easier.

But how many will buy a smartphone (that is only available on the AT&T network) just to make purchases easier. It has nowhere near the app ecosystem that takes years to build with efforts put in my thousands of independent app developers and app development companies.

On the cheap end of the smartphone market, there is cut-throat price competition and one-time stellar performers like Nokia are now trying to survive by being part of Microsoft. From Samsung to LG and Sony and many others, the cheap smartphone market has endless competition.

Content Producer?

Netflix enjoys the advantage of being the pioneer in the video streaming market and now boasts more than 50 million customer in the U.S. and in other countries around the world where it operates. Netflix has been in the game for many years now and understands the business and has started to produce original content including hits like House of Cards and Orange Is The New Black.

Netflix is harnessing its early-mover advantages and entering newer markets (adding new nations such as France and Germany to the list of countries where you can subscribe to Netflix) while others try to catch on — HBO Go and Hulu to name just two. Netflix is spending hundreds of millions of dollars to acquire content for its Amazon Prime subscribers who pay it $99 per annum for services such as two-day free shipping.

As Amazon advertisers it, Prime membership offers access to “unlimited” movies and TV shows as well as half a million free ebooks.

So, Amazon does not actually ‘charge’ anything to its customers to watch all that pricey content that it spends money to acquire from the content owners like Warner Brothers, 21st Century Fox, HBO and others. Netflix on the other hand charges $8.99 per month to viewers to stream its content.

Clearly, one more case of Amazon spending money to attract customers and grow its customer base without generating any revenues from that business.

How long will investors keep betting on Amazon to continue to remain a growth stock when it’s already exorbitantly overpriced?

Amazon’s Reputation

Amazon does not have a sterling reputation among either book publishers or authors both of whom feel exploited and squeezed by Amazon’s tactics. The latest controversy with publishers Hachette adds one more chapter to the growing anger at Amazon from both publishers as well as the writer community.

“He gets into fights with the Publishers and everything else and he is squeezing them and so it’s just typical of him,” as technology writer Kara Swisher put it, referring to Mr. Bezos.

Ebooks Competition From Apple

The recent acquisition of BookLamp by Apple might be a sign of Apple’s imminent foray into ebooks on iOS and OS X-based Apple devices. With its multi-billion dollar acquisition of Beats Music, Apple has shown serious intent in the music streaming business too. All of this cannot be good news for Amazon or its investors.

Conclusion

Given all this, only bravehearts (and Bezos fanboys) will stick with the Amazon stock. As Kara Swisher put it, when you buy Amazon stock, you buy into Mr. Bezos and his vision. The question is: how sure are you that his vision is going to succeed?

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