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2 Reasons to Sell Amazon and 1 to Buy

Even if you are bullish on a company, it's a good idea to consider the other side of the trade from time to time. (NASDAQ: AMZN  ) is among the market's most loved companies these days. The stock has risen by better than 250% over the last five years -- despite its profit level falling to a historic low. Below, I outline two of the biggest reasons that an investor should consider selling this outperforming stock and one for picking up shares at today's prices.

Sell reason No. 1: New competitors
First, Amazon's splashy push into new markets like online video, cloud services, and tablets has excited investors with the prospects of high-margin growth beyond the traditional retailing profits. But expanding into those new arenas has made Amazon the target of formidable, deep-pocketed rivals who will defend their home turf at all costs.

To name just a few examples, the company is now fighting Netflix over streaming video, Google and Microsoft over cloud services, and Apple in the tablet market. A long, drawn-out battle in any one of those arenas could sap Amazon's resources, distracting it from its core business of online retailing.

Sell reason No. 2: Huge spending
Next, the company's big-spending ways have sent operating margin to a new low, and there's no guarantee that Amazon will ever take the foot off the accelerator on investments.

It needs to spend upward of $1 billion a year for content rights in its competition against Netflix for leadership over the online streaming market. Heavy investments in that and other businesses sent Amazon's operating margin down to 1% last year, setting a decade low. By comparison, Wal-Mart books 6% of sales in profits. And even Costco, which charges a razor-thin markup on products, has Amazon beat at a 3% profit margin.

Buy reason No. 1: Cloud services growth
Then there's Amazon's cloud services division, or AWS. It has the early lead in a growing industry that's just beginning to ramp up. Cloud services are forecast to balloon into a $70 billion market by 2015. With Amazon leading the sector right now in terms of customer base and service portfolio, AWS is well positioned to hold that lead as the market blossoms.

That could make it the biggest driver of revenue and profits for the company in a matter of years. In fact, management expects the division to eventually rival its product sales in terms of size. While Amazon collected just about $2 billion in sales through AWS last year, Wall Street analysts expect that number to jump to more than $15 billion by 2020.

Still not sure whether buying or selling Amazon stock is the right move for you? The Motley Fool's premium report digs deeper into what's driving the company's growth to help you make your decision. The report also has you covered with a full year of free analyst updates to keep you informed as Amazon's story changes, so click here now to read more.

Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

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  • Report this Comment On May 13, 2013, at 11:06 PM, AllInItTogether wrote:

    I think AMZN is a fool's game -- and not the Motley kind.Trading at a P/E in excess of 3,000 (yup, that's right!), this is no hot new company, but a great retailer with a mature business model that still wishes it were something sexier. It's like a 45 year-old guy trying to hang with the kids. By contrast AAPL trading at a P/E under 11 seems to be a screaming bargain with two established monster products in its iPhone and iPad each with a dedicated user base. My conclusion: The markets are not rational. But we knew that. Nothing is. Eventually this should catch up with AMZN. I'd SELL now while it still commands these ridiculous valuations.

  • Report this Comment On May 15, 2013, at 1:32 AM, bocibean wrote:

    I'm in the cloud with this besides it wants to own the world pricey but I wouldn;t bet against amazon

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