A couple of years ago, Amazon was one of my favorite stocks to follow. As a matter of fact, I owned my fair share of the company at one point in time. As I started to look further and further into earning reports, spending, plans for expansion, and more spending, I got a bad taste in my mouth and sold all of my AMZN shares. I’m glad I did too, shortly after I off loaded my shares, other investors started to do the same as signs of more spending and losses to come became apparent.
A few days ago, Amazon finally released a report that had something new to them on it…net gains! While there were gains, the gains were relatively small compared to the cost of running the business and the mass amount of revenue generated by Amazon, we’ll get to that in a moment though. Anyway, after posting gains Amazon’s stock has been on a massive uptrend; leading to a comment I received on my post at Talk Markets from Trever Lowenthal. Here’s what he had to say…
“Hi Joshua, any thoughts on where you think AMZN is headed? Just hit a high in intraday trading today. Thanks!”
Before I get into my answer and why my answer is what it is, I’d like to express that I’m honored to have Trever Lowenthal reading my articles. I’ve been following him for quite some time on Seeking Alpha and recently on Talk Markets. He’s one of my favorite finance authors. So, if you haven’t read his work, take a moment to check it out! (back to the story)
My Response To Mr. Lowenthal
Amazon is obviously doing good short term. I’m still not convinced long term. I think I’ll have to see another profitable quarter before I pump my own money into it.
Why I Have To See More
I know I’m going to catch quite a bit of criticism for not jumping on Amazon right now…well, days ago actually. The fact is that since their report, their stock has gained more than $50 per share in value. That’s huge! In reality, if you’re a short term investor that likes to make trades and cash in quick, sure this is a place for you to make a quick buck. However, I like to invest for the long haul. While Amazon has improved in value quite a bit over the last few days, I’m not convinced that the trend is here to stay. There are a few reasons I’ve come to that conclusion…
Gains Were Minimal To Say The Least – A company the size of Amazon should be producing billions of net dollars per year. Amazon’s Q4 revenue was 29.4 billion dollars! However for some reason, the net profit on this massive amount of money was only $214 million. I think this is proof in itself that there’s a real spending issue here. At this rate, to reach a billion dollars in net gains, Amazon will have to earn more than $150 billion total revenue. In my opinion, the margins are absolutely ridiculous and we’ll need to see improvement before AMZN becomes stable as a long-term investment.
Amazon’s Spending Is Still Out Of Control – Think about it this way, Amazon generated a ridiculous amount of revenue, but $29.2 billion of the revenue went to costs. Sure, $214 million is a good amount of money, but when you break it down into payments to stock holders, we’re looking at $0.45 per share; with each share costing more than $300. Personally, I’ll pass on the dividends on this one.
2014 Was Still A Net Loss – Even after posting modest gains in the fourth quarter (the biggest shopping quarter around the world!), 2014 still proved to produce losses for Amazon. Overall, in 2014, Amazon lost $241 million! Personally, I like to invest in companies that gain.
Keeping the factors above in mind, I have to admit that I sure hate to see gains that I’m not part of. However, for me, as a long term investment, I still think the risk I’d have to take to invest in Amazon far outweighs the reward in the long run. So, for now, I’ll stay away.
What Do You Think?
I’d love to know what you think of Amazon as an investment option. Let me know in the comments below!