You may have already bought something from Amazon this week but would you buy their stock now? With a P/E ratio pushing a lofty 1,400, a year-to-date increase in share price that doubles the S&P 500 Index, and the company's CEO talking on television about delivering packages with drones, investors have both a fundamental reason and a contrarian case against buying or holding Amazon (NASDAQ:AMZN).
How can Amazon support such an extreme valuation?
Amazon has demonstrated the ability to consistently grow revenue but its earnings per share has declined for two consecutive quarters. Is there more to Amazon than their massive online marketplace, the popular Kindle e-reader, and the Kindle Fire tablet?
For one, Amazon's brand recognition and customer loyalty can be leveraged in a way that Apple has done. For example, Amazon has expanded their cloud computing services to enable their customers to seamlessly link their Amazon devices and accounts for easy access and sharing of content, such as e-books, music and videos.
Another possible future driver of growth is Amazon's latest business model to deliver packages on the same day as the consumer's purchase. They are testing markets now with same-day delivery of some products, such as groceries and clothing. In an interview on Sunday's CBS News show, 60 Minutes, CEO Jeff Bezos said, "If we can make this model work, it will be great because it extends the range of products we can sell."
In the same interview, Bezos showed off a new idea for a delivery system, which consists of drones, called octocopters, that look like small helicopters. The drones, potentially in service within a few years if issues with the Federal Airlines Administration (or FAA) can be worked out, would be able to deliver small packages within 30 minutes of the customer's order.
It appears now as if Bezos is not just in the business of selling products online but he is also in the business of selling ideas.
Contrarian case against Amazon
Even if an investor is comfortable with Amazon's high valuation and feels that their business model and ideas support future growth potential, a contrarian case can be made against owning shares. Amazon's stock price has climbed nearly 53% year-to-date, 2013, which is more than double the return for the S&P 500 for the same period.
Amazon's strength has also helped lift the consumer discretionary sector. For example, Vanguard Consumer Discretionary ETF (NYSEMKT:VCR), which, as of October 30, included Amazon as its top holding, is up more than 37% year-to-date, and the sector is poised to end 2013 as the top-performing sector of the year. A contrarian investor, who would often invest in an opposite way as conventional wisdom suggests, might argue that Amazon's recent performance and outlook are just too good to be true.
Buy, hold,or sell Amazon?
So Amazon has shown that it can sell products and that it has potential to leverage its popular brand to expand its enterprise. But what can existing or prospective shareholders expect in the future? Can Amazon continue reinventing itself by introducing new and innovative ways to deliver its products and services?
To buy or hold Amazon stock now, an investor must be comfortable with Bezos' hopeful words, "If we can make this model work" and have confidence that his ideas can indeed extend the range of products that they sell and that earnings will grow, not just revenue.
Selling shares now is a bet that Amazon's price is too high, earnings are too low, recent sector outperformance may be closer to the end than the beginning, you don't want to put capital to work to buy drones, or you just want to lock in some nice gains.