Don't Buy Amazon.com. Fear It.

When investors contemplate Amazon.com (Nasdaq: AMZN  ) , they shouldn't think of buying shares; they should ponder the many ways this is one scary company out there in the marketplace. Amazon could be renamed The Great Disruptor, given its disruptive and sometimes even deadly influence on a variety of mature businesses.

Here are some of the industries and companies Amazon has disrupted (or is at least trying to disrupt):

Bookstore chains: Borders is bankrupt and liquidated; Barnes & Noble is hanging on for dear life in the dog-eat-dog world of bookselling. Amazon.com stripped them of their every advantage by providing better selections, major convenience, and massive price cuts. And of course, Amazon's Kindle originally set the e-book revolution in motion.

Electronics retailers: Circuit City's gone, and once-mighty Best Buy (NYSE: BBY  ) is weakened. When you discuss what's gone wrong with Best Buy, many, many fingers now point to Amazon more than smaller electronics retailers such as hhgregg (NYSE: HGG  ) and Conn's.

Shoe retailing: Amazon owns Zappos; enough said. Can Gap's (NYSE: GPS  ) Piperlime online shoe site ever do that well with Zappos on the scene? It also can't make life easy on bricks-and-mortar shoe peddlers such as DSW Shoe Warehouse.

Publishing: Amazon's CreateSpace allows artists to self-publish and distribute their work for a pittance. Customers order the works on a print-on-demand basis, taking a heck of a lot of the expense out of the publishing process and creating a win-win for Amazon and DIY artists. The middle-man model of old-school publishing could become yet another anachronism before too long.

Apple (Nasdaq: AAPL  ) : Amazon's Kindle Fire is, of course, a competitive jab at the iPad. Amazon offers MP3s on its site in direct competition to iTunes, too, but that's old news.

Netflix (Nasdaq: NFLX  ) : Netflix's mistakes could be Amazon's gain in the nascent and growing streaming video category, as my fellow Fool Seth Jayson recently pointed out.

The cloud. Don't forget the cloud.

Did I forget some? Most definitely. And just because Amazon's competitive presence in some areas hasn't taken a major toll yet, that doesn't mean it never will. Investors should really worry about whether the companies they own are in Amazon's crosshairs, because it's not a good place to be. Amazon has pretty darn good aim and a heck of a lot of firepower.

Here's another Amazonian element investors should fear, at least if they're thinking of buying in: its price. Amazon trades at 104 times forward earnings; its PEG ratio is a monstrously mind-boggling 7.38. The stock is horrifically overvalued. Yes, Amazon's brutal competitiveness translates into major growth, but I can't imagine the kind of insane growth coming to justify such nutty multiples. (For comparison, tech powerhouses Google and Apple are trading at forward P/E ratios of 14 and 10, respectively.)

The simple description of Amazon as an "online retailer" is a serious red herring when you consider the massive reach Amazon has. Don't buy Amazon. Fear it. And keep on the lookout for some temporary pessimism to deliver a serious whack to Amazon's stock price, so you can get in on the future of The Great Disruptor, too.

Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of Google, Gap, Best Buy, and Apple. Motley Fool newsletter services have recommended buying shares of Google, Amazon.com, Netflix, Apple, and hhgregg, creating a bull call spread position in Apple, and writing covered calls in Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 08, 2011, at 12:09 AM, therealguru wrote:

    Is it amazons fault that they have a great business model and they took over the game? no. stop crying about it and buy the stock or talk about something different no one wants to hear your sob story about how they "destroyed" businesses, its called capitalism get with it or get away from it

  • Report this Comment On November 08, 2011, at 12:47 AM, videophool wrote:

    I don't see any upside. Like Netflix two months ago, Amazon is priced for unlikely perfection. Margins will continue to drop as they will sell the Fire at a small loss, and are now also investing in streaming content. I anticipate that the Fire will fail to get the market share necessary to impress and AMZN will take a haircut.

  • Report this Comment On November 08, 2011, at 12:51 AM, Brioxx wrote:

    "Climbing the Wall of Worry",,, Alyce

  • Report this Comment On November 08, 2011, at 1:04 AM, ArmyRanger11 wrote:

    Buy a company that is chewing up the competition in numerous different sectors? Who would want a piece of that action, especially in the historical months of increased consumer spending...? Uh...me!!

  • Report this Comment On November 08, 2011, at 2:18 AM, megoogler wrote:

    All will start to end in the 1st quarter of 2012 - all the losses on Kindle Fire, Prime shipping, Prime movies, Prime ebooks, more states demanding taxes - will come home to roost. Amazon is finished by the end of 2012, will start lay-offs.

  • Report this Comment On November 08, 2011, at 9:21 AM, EGTalbot wrote:

    Regarding publishing, you're right and you're wrong. Old school publishers are not even slightly worried about Amazon's Createspace, which is primarily focused on paper books. They're much more worried about ebooks and whether they can keep their stables of authors. And Amazon is of course the primary threat to them in this regard. So far, old school publishing has held on pretty well during the transition. We'll see if that continues, or if more big name authors make like J.K. Rowling.

    The other threat you didn't mention is Amazon's new imprints: Montlake, Thomas & Mercer, etc. These compete even more directly with publishers. Thus far, the penetration of these imprints is not enough to cause major disruption. But it's not hard to see them expanding and posing a bigger threat, given their more favorable terms for authors.

  • Report this Comment On November 08, 2011, at 10:00 AM, yhtbaotbai wrote:

    If shoes are needed, I believe that Nordstrom's is the very best. I would be reluctant to buy shoes on line, even from Amazon. Did you know that Nordstrom's began in Seattle as a shoestore? Yes, it did, and that may be why they are so superior in footwear to this day.

  • Report this Comment On November 08, 2011, at 11:00 AM, chadscards1274 wrote:

    Right on about valuation I'd be interested to read some old articles about say CSCO when it was at 100 times earnings or MSFT when it was at 56 times earnings. There is a big difference between a great company that disrupts the market and a stock that is overpriced.

    Video competition - streaming on AMZN not so much tried it and NFLX is light years ahead...content, quality of the stream, queue system, etc. While AMZN does compete with AAPL for per item downloads that hasn't seemed to slow down AAPL too much.

    Shoes - no way my wife must have 50 pairs of shoes there is no way she buys them online. This is one category where if you can't feel it it doesn't work.

    Books, Electronics, anything where you get the same thing and it doesn't require trying on or it's a commodity = AMZN only goodbye pretty much everyone else. The only way companies like Best Buy make it is cell phone sales to people not comfortable buying online or for bigger items like desktop computers and the like where having a physical presence if you need to return something makes more sense.

  • Report this Comment On November 11, 2011, at 2:52 PM, monkeywrenchgirl wrote:

    Allentown's Morning Call recently published two hard-hitting stories that detail amazon.com's abusive labor practices at their Lehigh Valley Warehouse. A follow-up story featured a local grandmother who vowed never to send them another penny. Amazon.com's customer service department received thousands of e-mails from concerned customers who expressed the same sentiment. I understand that investors encourage such labor practices, as they are put in place to cut operating costs. Amazon.com strives to be the most customer-centric company on earth and, well, a fair amount of their customers are now disgusted and refuse to shop amazon.com. Are investors so hardened and far-removed to actually believe that these concerned customers will not follow through on their word and have any noticeable impact on sales? Or, is amazon.com, and every related investor site, attempting to conceal the Morning Call's findings, and the fact that the story was picked up by nearly every major media publication? Americanrightsatwork.org is generating a petition, interested groups are attempting to educate amazon.com customers just prior to the upcoming holiday season, and I don't see how anyone with vested interests in amazon.com's success cannot see this as a potential problem.

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