The Case for Ignoring Amazon’s Stock

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On Thursday afternoon, the world’s largest e-commerce company – Amazon (NASDAQ:AMZN) – reported its first-quarter earnings figures. The company reported earnings that were roughly in line with analyst estimates of 23 cents per share. However, revenue figures were strong: They came in at $19.7 billion versus $19.4 billion, which represents an increase of 23 percent. Nevertheless, the stock was flat in after-hours trading after an initial pop.

Given that figures were slightly stronger than expected, is now a good time to buy Amazon shares?

Oftentimes, when a stock doesn’t react positively to bullish news, this indicates that something may be wrong, and that there is reason to be concerned. However, that may not be the case for Amazon. After all, the stock has risen nearly 10 percent from its lows reached just a couple of weeks ago, and while the numbers were solid, they were not extraordinary. Therefore, traders might be using this short-term strength to take some profits.

Amazon shares have been extremely weak so far this year, but this follows a very strong performance in preceding years. Despite the fact that the company has very little earnings, investors have been confident that the company is going to continue to grow its revenues rapidly, and they believe that once the company is done rapidly investing in its distribution centers that more of the company’s strong revenues will be reflected in its profits.

That may be true, but it still begs the question: How do we value Amazon? Traditional metrics such as a price-to-earnings ratio or a dividend yield cannot be applied — or rather, if they were to be applied, the stock would be trading at a tiny fraction of its current valuation. In fact, many investors believe that this would be appropriate, and for a long time, they have been shorting the stock and losing money doing so.

But at what point does Amazon actually start generating profits? Analysts have been predicting this for years, and we haven’t seen significant profits from the company, which has earned less than $5 per share in the past four years despite trading at over $340 per share. Another concern is that if Amazon stops investing in its infrastructure and starts generating profits for shareholders, then it will lose its competitive edge; its profitability could lead to its downfall.

Given these points, Thursday’s earnings release is nothing new. We saw strong revenue growth that reflects Amazon’s dominance in the e-commerce industry, coupled with virtually no profits.

Because of this dichotomy, I think it is very difficult to make a case for Amazon shares, either long or short. However, if I had to pick a side, I would want to be long – at least at lower prices. Right now, there is far too much enthusiasm for the stock. Analysts have a one-year price target of $430 per share, and there are virtually no analysts who follow the company who have a bearish outlook. With this earnings report behind us, I expect very little to change on this front.

Given this bullishness, I think we can see the downtrend that began earlier this year continue. Amazon is in need of a significant correction that will lead bulls to question their thesis that has held up so well despite the company’s lack of profitability.

As someone who doesn’t own Amazon but who wants to, I think a good strategy is to wait for analysts to start showing more appreciation for the bearish camp. Once analysts start to argue that near-term profits matter, then we will see price targets come down dramatically. Even if the company hasn’t yet started generating profits, I think this will be the time to buy Amazon.

For now, however, the uptrend is broken, and so it is not a good stock to be long from a trading perspective. It also doesn’t offer good value, nor is it a good contrarian bet, and so now is not a good time to own the stock from a fundamental perspective. The best strategy is to simply wait for a better opportunity.

Disclosure: Ben Kramer-Miller has no position in Amazon.

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