If you spend any amount of time reading investment commentary you've probably come across the term "Apple-heads" to describe the legion of consumers who religiously purchase Apple products (of which I am one, by the way).
Well, today, I'm going to coin a new phrase: Amazombie!
Personally, I think Amazombie should be added to Webster's with the following definition…
Amazombie: Any individual investor or institutional investor who: 1) Extols the virtues of value investing made famous by Benjamin Graham and Warren Buffett 2) Yet, still buys Amazon stock, regardless of the fact the stock trades well beyond conventional valuations associated with value investing.
Don't get me wrong, I'm not saying Amazon is a bad trade (from a trader's perspective) – heck, people have made a fortune investing in Amazon off its November, 2008 lows – but as a long-term investment I think the days of its stock gaining 100% annually are long gone.
A Giant Threat Is About to Challenge Amazon's Dominance
Amazon.com, Inc. (NASDAQ: AMZN)'s 13,813% total return since it IPO'd in 1997 came with one very powerful tailwind filling its sails – it was, for all intents and purposes, the only game in town for directly investing in industrial-scale online retailing.
The company had a deep moat and a gigantic first mover advantage.
But that's about to change…
Alibaba (China's e-commerce juggernaut) is expected to IPO here in the United States in later this year.
Based on initial valuations, Alibaba is expected to have a market cap of approximately $170 billion ($25 billion more than Amazon's current $147 billion cap) giving investors another way (and a big one at that) to invest in online retailing.
Beware, the Amazombies might try and corner you with numbers like average annual revenue growth of 30% over the last 10 years. That's great top line growth, indeed.
In fact, just last week, Amazon reported Q2/2014 sales increased 23% to $19.3 billion.
At first that sounds pretty good until you realize the company's operating expenses were $19.4 billion, which led to a -$126 million loss for the quarter.
That's bad – and the worst part – is the losses are expected to increase before getting better.
Looking forward, the company expects to lose as much as $810 million in Q3/2014. Yikes, that's going the wrong way.
At this point, Amazombies typically point out that the company is investing for the future and that its other businesses, such as Web Services, is really where the company's future growth is going to come from.
I don't see that happening.
Amazon's Web Services division has no moat, no first mover advantage and it faces stiff competition on every front, from small niche companies to heavy-hitters like Cisco & IBM – and its revenue appears to be declining, not accelerating.
In Q2/2013 the company's "other" category (which includes Web Services) saw sales decrease 3% to $1.17 billion.
Even if sales in its "other" category were stable, they still only represent 6% of the company's top line. It would take years of double digit growth from Web Services to have any material impact on the company's profitability.
As I write this, AMZN has lost 10.6% since July 24, 2014, which erased $17.6 billion off the company's market cap.
The Amazombies will tell you now is a great time to scoop up shares at a discount.
My question would be, "Do you mean a discount to last week when the stock was trading at 559x trailing 12-month earnings?" Give me a break.
Even after a $17.5 billion haircut, AMZN is still trading at 499x earnings.
That kind of valuation is understandable for a $250 million growth stock – but for a $147 billion company those numbers are basically unheard of.
Screen Out These Inflated Ratios to Find the Next Winners
About the Author
Sid is the investment community's best-kept secret. Since 2009, he's served at Money Map Press as Director of Research, analyzing thousands of securities and profit opportunities for subscribers. He's an expert in identifying "alpha" potential in a wide variety of industries, but especially the small-cap sector, where he's discovered a pattern of profits that's almost foolproof.