7 reasons Amazon shares are going nowhere

The stock is not a bargain, and there's no guarantee of a rebound anytime soon.

By MSN Money Partner May 16, 2014 2:45PM
Credit: © Michel Spingler)

Caption: The Amazon logo is seen on the logistics center
By Jeff Reeves, MarketWatch

Amazon (AMZN) is one of the most prominent flame-outs of 2014.

Shares of the e-commerce giant are down about 24 percent since Jan. 1, even as the broader market is up slightly and pushes up against all-time highs.

Some investors may be inclined to see this as a buying opportunity. After all, even after the pullback, Amazon is up 350 percent or so since the March 2009 low. And from fiscal 2010 to fiscal 2013, Amazon more than doubled revenue.

But don't be fooled. Amazon is not a bargain, and there's no guarantee of a rebound anytime soon.

Here's why:

Sentiment stinks: Amazon stock's slump in 2014 is a clear vote of no confidence. But also worth noting are recent analyst moves on the shares. Raymond James downgraded Amazon in late April, and others including Bernstein and RBC recently cut short-term price targets. The reasoning is simple: Amazon's big run has left little room for error, but year-over-year comparisons will be increasingly difficult for all aspects of its business.

Amazon earnings disappoint . . . again: The reason for the downgrades wasn't revenue. Amazon sales rose in its latest earnings report. However, profit was an anemic $108 million, barely hitting the mark, despite a massive $19.7 billion in revenue. Worse, earnings guidance disappointed the Street -- just as it did in January. Investors have been patiently waiting for profits, but it's clear that they’ll have to keep waiting for some time.

Cash burn continues: The big reason profits are thin is because of cash burn on new efforts. For instance, Amazon just spent a pretty penny on an exclusive deal with HBO for its older content, including "The Sopranos" and "The Wire," and separately is spending big on its own in-house original content.

Beyond its streaming video expenses, there also has been big investment over the past year or so in warehouse expansion and a big commitment to Amazon Web Services growth across 2014 and 2015. In other words, don't expect these big expenses to fade and profits to pick up any time soon. That means more waiting and hoping, which has been standard procedure for Amazon investors for years, and some are starting to have their doubts.

Amazon is still overvalued: Back to those profits, Amazon is trading at a huge forward price-to-earnings ratio of over 90. That's based on projections of $4.24 in earning per share for fiscal 2015, according to Standard & Poor's -- presuming, of course, guidance doesn't change again and push those targets even lower. It's worth noting that Amazon has had a triple-digit P/E in the past. In mid-2013, for instance, Amazon saw this valuation metric top 100, and the stock soared about 60 percent in six months. It quickly gave back most of that in the recent correction, so keep that in mind.

Bezos is chasing fads: While some investors are increasingly impatient for existing business models to focus on profits instead of revenue growth and reach, others simply can't stomach some of the quirky ideas that have been coming out of Amazon as of late.

Fire TV, which is a late (and comparatively pricey) entry into the streaming hardware space? Drones, despite the legal issues surrounding privacy and the logistical issues of navigating aircraft in dense urban areas where most Amazon customers live? Or its own Amazon digital currency? Rumors of an Amazon smartphone, which will surely be unprofitable considering the lack of profits in low-priced handsets, and after it is already selling its Kindle tablet at cost with zero profit impact? While spending big on warehouses closer to customers makes sense, the latest crop of ideas doesn't exactly inspire confidence, and puts the pressure on the core business to perform even better.

Risks to the core: Even if you can overlook all this and simply depend on Amazon's core business to eventually become profitable, offsetting big expenses and justifying the crazy earnings multiple at some point, the problem is that Amazon faces serious risks to its core e-commerce and fast-growing Amazon Web Services arm.

The planned price increase to Amazon Prime could cause some customers to defect. Also, an increasingly reliance on third-party merchants may help margins (Amazon incurs negligible fulfillment expense and simply takes a small cut of the sale), but is creating a big revenue headwind. In the absence of profits, Amazon stock may not be able to handle this.

What if consumer spending stalls?: And just to throw some more fuel on the fire, let's not forget that retailers have been under pressure. Sure, Amazon had managed to sidestep that negativity in 2013 thanks to its absence of brick-and-mortar locations, but April retail sales were ugly, and if some anemic growth metrics stay weak or slip even further, Amazon's stock won’t be able to avoid the impact of a spending slowdown in 2014.

For the record, I am not expecting a crash in Amazon. And, in fact, I'm a long-term bull on Amazon because I think the company will be around a very long time.

I own a Kindle and do a lot of shopping on Amazon. I have been an Amazon Prime member for some time, and I am more than willing to suffer through the increase in price from $79 to $99 a year for the value that the service provides me.

But one of the biggest mistakes traders make is confusing a decent product with a good investment.

And I think that there are much better places to put your money in the short-term, and there’s no guarantee of outperformance in Amazon over the next 12 to 18 months.

While it's possible Amazon may some day set up a good way to drive sustainable profit growth, there are no guarantees that the company will ever have anything more than scale and massive revenue at razor-thin margins.

If you're patient and don't mind sticking around for the long-term with no hope of a dividend, be my guest.

But as for where I'm investing in 2014, Amazon isn’t on my list. And maybe it shouldn't be on yours either.

--Jeff Reeves is the editor of InvestorPlace.com.

More from MarketWatch

Tags: AMZN
May 16, 2014 3:44PM
Amazon may be a poor investment but they provide a valuable service that will not go away anytime soon. 
May 16, 2014 3:59PM
I'm not ready to jump on Amazon stock as I see it overpriced, but it is still my first stop for shopping, whether it's just for product reviews, price checking or actual purchase. The price jump for Prime didn't bother me one bit, I save much more than that on freight and video streaming not to mention 1 free book a month and great prices for Kindle books. I've read over 70 titles in the last year. Powell's Books misses me, they even sent me a coupon :)
May 16, 2014 10:32PM
Think I saw an Amazonian Drone fly over earlier..?? Unfortunately it shidt on me, so it may have been a bird....?
May 16, 2014 7:39PM
Amazon cannot exist without fiat money funding it's virtual existence. It isn't capable of enterprise at a sustaining level. Restore the businesses it destroyed, send Bezos back to his home planet. 
AMAZON will rule your life one day...count on it.
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