Amazon.com (Nasdaq: AMZN)
have been a favorite for growth investors.
In a world of sluggish retail sales, e-commerce has been a
rare bright spot. For consumers, the lower prices and convenience
of ordering online is appealing.
Amazon has been one of the biggest beneficiaries. Between 2010
and 2012, the company's revenues have surged 78%. Sales are
expected to grow another 22% this year.
Such rapid growth has attracted investors to the stock.
Amazon's share price has nearly doubled in the last three years,
and its market capitalization now stands at nearly $150
The Seattle retailer has grown considerably from its humble
beginnings as an online book vendor when it was founded in 1994.
In its recent cover story on founder Jeff Bezos,
accurately describes how "Amazon became the
I love the company and have been an
customer since 2007. But I've never bought the stock. And
for one simple reason...
Amazon isn't profitable. With few exceptions, the company has
basically operated at break-even or turned a tiny profit.
Investors have turned a blind eye to the company's lack of
profitability, instead choosing to embrace the company's
expansion into new product categories such as its high-end
artwork, its development of the Kindle e-reader, and its
cloud-computing service, Amazon Web Services.
Amazon bulls argue that the company is investing in its future
by aggressively growing the business. And so it's
reinvesting all of its cash in growth. But that begs the
question: when will Amazon start making some
Where Are the Profits @ Amazon?
*Revenues and net income expressed in billions
Last quarter, Amazon reported a net loss of $7 million, or
$0.05 per share. Those losses aren't staggering. But they do show
that Amazon is unprofitable.
This year, analysts estimate that Amazon will earn $0.86 per
share. While that may sound decent, that's a net profit of
just $400 million - a profit margin of just 0.5%.
Even in the world of low-margin retail, that profit margin is
are two of the biggest discount retailers in the U.S. Even
with the cost of a huge physical presence, Costco operates with a
1.9% profit margin and Wal-Mart at 3.6%. Those are razor-thin
profit margins, but are considerably healthier than
With Amazon shares trading at $328 - just a few points below
their all-time - investors are betting big on the company's
Analysts also expect bigger profits from Amazon.
Estimates call for EPS to more than triple next year. By
2016, they're predicting EPS of $10.61. But that's a full three
years away, and who knows what will transpire between now and
There is no doubt that the stock is expensive. Shares
are trading at a P/E multiple of 112-times next year's earnings.
Even when I take a long view of Amazon - and value it based upon
2016 EPS - shares trade at 30-times earnings.
Even that valuation is rich, when you consider that Amazon is
growing its sales at 20% a year. Plus, the company hasn't
demonstrated any ability or desire to turn a profit.
Amazon's sole focus is growing revenues and expanding its
business. With no commitment from Bezos or management to
turn a profit and return capital to shareholders, Amazon is a
stock investors should avoid. Owning Amazon shares is
simple speculation that someone else will pay more for the stock
in the future.
What do you think of Amazon shares? Would you ever buy
the stock? I want to hear from you - my email is
Next week I'll tell you more about Costco and Wal-Mart. And
I'll explain why these brick and mortar retailers are better
suited for income investors who want a more conservative