Amazon Stock: Short-Term Weakness Could Create a Buying Opportunity

Amazon stock has declined as investors seem disappointed with the company’s financial performance. But the long-term growth story is still intact.

Aug 13, 2014 at 9:11AM

Amazon Image


Amazon (NASDAQ:AMZN) stock has declined by nearly 20% year to date as investors seem to be disappointed with the company's lack of profitability. But it's important to keep in mind that Amazon is doing a tremendous job at consolidating an indestructible leadership position in the promising online retail industry. The short-term negativity hurting Amazon stock could create a buying opportunity for long-term investors in the company. 

Growing sales, falling profits

Amazon is one of the most innovative and disruptive companies in the world. The company has the first-mover advantage in online retail, and its aggressive competitive drive has allowed it to consistently gain market share versus brick-and mortar retailers. In addition, Amazon has successfully expanded into other areas such as cloud computing, digital content, and hardware over the last several years.

This has produced amazing results for investors in Amazon stock over the long term, as the company has generated spectacular growth rates in key variables such as sales and operating cash flows.

AMZN Revenue (TTM) Chart

AMZN Revenue (TTM) data by YCharts

On the other hand, Amazon sells its products for competitively low prices. Also, the online retail leader is heavily investing in areas such as building its fulfillment centers, building a gigantic distribution network, adding digital content to its library, and expanding its Amazon Web Services division, among other things.

All these investments are taking their toll on profitability: Profit margins have been clearly declining since 2010, and the company is losing money at the operating level. Amazon reported an operating loss of $15 million during the second quarter of 2014, and management is forecasting a bigger operating loss of between $410 million and $810 during the third quarter of the year.

AMZN Revenue (Quarterly) Chart

AMZN Revenue (Quarterly) data by YCharts

Understandably, growing losses are generating anxiety among investors in Amazon stock, and many of them seem to have thrown in the towel lately, at least judging by the market performance of Amazon stock over the past months.

A long-term focus

It's important to keep in mind that Amazon is not making all these huge investments because it needs to do so in order to survive. The company could easily cut back on spending if it preferred to put current profitability above long-term opportunities for growth. But Amazon is all about building competitive strengths over the long haul.

This is not simply an excuse the company is using to justify its low profit margins. Amazon has been straightforward about its strategy since the beginning. We can read it in the company's first letter to investors in 1997:

We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.

Amazon has been extraordinarily successful at consolidating its competitive position as it grows in size over the long term. Scale is a crucial advantage in discount retail. All else equal, selling more products means lower fixed costs per unit, which Amazon translates into lower prices for its products.

Amazon Prime is a huge source of competitive strength for the company, creating customer loyalty and generating growing sales. Amazon Prime offers free two-day shipping, access to the Prime Instant Video online streaming library, and the ability to borrow books from the Kindle Owners' Lending Library, among other benefits, for the price of $99 a year. 

A report from Consumer Intelligence Research Partners last year estimated that Prime members buy from Amazon 50% more frequently than non-Prime customers. Besides, the study claims that Prime members spend almost twice as much, with an average purchase amount of $1,340 per year versus $708 per year for non-Prime customers.

Amazon does not disclose precise membership numbers for its Prime program, but the company said in December 2013 that it has "tens of millions of members worldwide." Management also said in the most recent earnings conference call that growth is accelerating, as Amazon gained more Prime members in the second quarter of 2014 than during the same period in the prior year, so the company seems to be performing remarkably well in that area.

Customers just love Amazon. The company has ranked in the first position in its industry in the American Customer Satisfaction Index, compiled by the University of Michigan, during every year from 2000 to 2013. Based on the 2013 ranking, Amazon has a score of 88, materially higher than the industry average of 78 for online retailers.

Key takeaway

For investors who like companies generating predictable and stable earnings, Amazon is certainly not the right alternative. However, for those who prefer innovative growth companies with a long-term strategic vision and spectacular competitive strength, the recent dip in Amazon stock could provide a buying opportunity. Profit margins will most likely remain under pressure in the middle term, but the Amazon growth story is still intact.

Leaked: Apple's next smart device can make your rich.
Unlike Amazon, Apple has been enormously successful at generating both disruptive innovation and huge profitability over the long term. Keeping this in mind, you may be interested in Apple's new revolutionary product. Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Andrés Cardenal owns shares of The Motley Fool recommends The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers