Was I Wrong About Amazon.com?

Every once in a while we need to take a step back and take a fresh look at our investments, particularly ones we may have gotten wrong. Today I'm doing that with Amazon.com (Nasdaq: AMZN  ) , a stock I have been negative on all year and shorted earlier this year. My short position is contrarian to not only many of my fellow Fools, but also some of our most successful newsletter services -- which have made a killing on Amazon.

So am I wrong? Was my thesis incorrect? Or is the market just crazy? These are questions I have to answer.

The numbers tell all ... sort of
First I looked at the company's financial trends. The following chart shows revenue growth and net income over the past five years. Revenue growth has declined for the past year, and profits are down from their peak at the end of 2010. Declining earnings are supposed to be a bad thing for a company, right?

AMZN Net Income Chart

AMZN Net Income data by YCharts

Not only have financials gotten worse over the past year or two, but the company also expects them to be even worse in the third quarter. Revenue growth is expected to be between 19% and 31% in the third quarter of this year, likely another decline from last quarter. Operating loss is expected to be between $50 million and $350 million, down from an operating profit of $79 million last year.

Based on these financial trends, I don't see any reason to think my thesis is incorrect. Maybe the market is seeing something in the products Amazon is introducing.

Are any of the company's new products making an impact?
Amazon in dominant in online retail, but many think it has real potential in a few new markets.

Online streaming is one thing Amazon has tried its hand at, but as a subscriber to Netflix (Nasdaq: NFLX  ) and an Amazon Prime user, I don't find Amazon compelling in the least. It honestly seems like a bad effort to get into a business that everyone identifies as a huge growth opportunity. Comcast has done a better job with Xfinity, Hulu is a popular alternative that is easy to use, and Apple (Nasdaq: AAPL  ) reportedly has its eyes on turning this market upside down. As Netflix found out, even a large stable of users doesn't make profitability in streaming a slam-dunk. There's potential here, but not enough to worry me about my short call.

Tablets are another area that many have identified for growth, but if fellow Fool Evan Niu's recent post is correct, the sales numbers are terrible. Amazon has had to subsidize Kindle sales just to get into the market, and the competition is just starting to heat up. Apple is reportedly preparing a 7-inch tablet to go along with its dominant iPad, Samsung's lineup of tablets is garnering a reaction even from Apple, and Google's (Nasdaq: GOOG  ) Nexus 7 is another solid competitor. Amazon is supposed to release a new Kindle Fire next week, but I still have doubts about whether it will be a big player in the table market. At the very least, Amazon hasn't ridden its sales to considerable profits yet.

Amazon Web Services shows a lot of potential, and if there's anything that worries me, it's that this becomes a big business. What's hard for me to judge is exactly what the financial impact will be long-term on a business that has generated $54 billion in sales in the past 12 months. Last quarter, non-retail sales (which includes AWS) accounted for only 4.3% of sales, although it grew faster than 50% annually. I'll mark this up as a worry for my pick, but not a dealbreaker yet.

Final assessment
To me, Amazon still looks a lot like two former All-Stars on the market: Netflix and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) . Both of these stocks traded at crazy P/E multiples before crashing to Earth, as growth didn't live up to expectations.

GMCR P/E Ratio Chart

GMCR P/E Ratio data by YCharts

Amazon may not be in for the same kind of disastrous fall, but the company hasn't shown the ability or the desire to beef up the bottom line, choosing to expand its reach instead. Until Amazon can prove its ability to make a consistent profit on continually growing sales, I'll stay the course. I think the market is being irrationally exuberant with this stock and eventually my short call will pay off.

For even more detail on Amazon, check out our premium report on the stock. It highlights both buy and sell arguments in great depth and comes with continuing updates and guidance on the company. Find out more about the report.

Fool contributor Travis Hoium is short Amazon.com and manages an account that owns shares of Apple. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Apple, Green Mountain Coffee Roasters, Netflix, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Netflix, Green Mountain Coffee Roasters, Apple, Amazon.com, and Google, creating a bull call spread position in Apple, and creating a lurking gator position in Green Mountain Coffee Roasters. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

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 September 02, 2012, at 4:47 AM, H3D wrote:

    At some point Amazon investors will lose 95%+ of their investment.

    The only question is when.

  • Report this Comment On September 07, 2012, at 11:35 AM, gliderboy wrote:

    I previously sold 1/2 of my Amazon position over concerns about the effect of new state sales taxes. The market has let me know that was a mistake, and I will hold my remaining shares.

    Currently, I think Amazon is being priced more on revenues and given the current price the stock is selling at only 2.2 times revenues. Cheaper than McDonald and many other stocks by that measure. So the market seems to think that the decline in profit is due to the investment in Kindle/Cloud/expanding market share, and that it will ultimately come roaring back. Just my 2 cents.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2004040, ~/Articles/ArticleHandler.aspx, 10/24/2014 7:23:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement