Amazon.com's (NASDAQ: AMZN ) stock has been on a tear lately.
Shares of the e-tailer are up more than 250% over the past five years. It isn't hard to see why investors are excited. The retail giant has managed to grow quarterly sales by better than 20% for more than three years. And it's not just in the online retailing business. Amazon is gaining traction in the cloud services market, and building out its ecosystem for digital sales, too.
The main risk when buying a high-performing business like this is in paying too much. At around $120 billion, Amazon is valued at almost exactly two times the $61 billion it booked in revenue last year. That amounts to a hefty premium compared with retailing peers Costco, Target, and Wal-Mart, which all trade for closer to 0.5 times sales. If Amazon were valued like them, it would trade for around $70 a share -- not the $260 it has been fetching. However, those other retailers can't claim nearly the same level of growth opportunities that Amazon does, particularly in its cloud services division.
But the bigger risk to investors, in my view, is that Amazon stretches itself too thin. For a retailer that on any given week can send out a press release from its in-house studio arm, and another announcing pricing changes to its home-made tablet lineup, that could be a problem. Sure, a healthy mix of revenue streams is an asset in any business. But the problem with competing in non-core industries is that it's tough to match the devotion of entrenched rivals. Amazon is fighting no less than Apple in the tablet space, Netflix in the streaming world, and eBayÂ in online marketplaces.
Each of these competitors is defending its home turf, and it absolutely can't afford to lose. Amazon, on the other hand, is looking for an additional growth market. And of course, the company still needs to watch out for major retailers that are itching to win back some of the market share they've lost over the years.
More on Amazon from The Motley Fool
Everyone knows Amazon is the king of the retail world right now, but at its sky-high valuation, most investors are worried it's the company's share price that will get knocked down instead of its competitors'. The Motley Fool's premium report will tell you what's driving the company's growth, and fill you in on reasons to buy and reasons to sell Amazon. The report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.