Despite its growth potential, Amazon stock (Nasdaq: AMZN) is not a good buy right now - but there is still an AMZN profit opportunity...
Amazon.com Inc. stock has fallen as much 29% since it peaked at over $400 a share in January 2014. It fell below $300 in October before climbing back above that figure just last week.
Amazon is still seeing ups-and-downs from bears who are wary of when the company will finally post a profit. While quarterly sales continue to climb year-over-year, an unsettling trend has emerged in AMZN earnings: red ink.
In Q3 2012, AMZN generated a $274 million loss on its acquistion of the online discounter LivingSocial, and with the expansion of its Kindle Fire product line. It was the first loss for the e-tailer since Q2 2003.
From then on, AMZN earnings were back-and-forth. In five of the last nine quarters, AMZN has posted losses. The biggest was announced in the most recent reporting in October, when the company reported its largest loss on record: $437 million.
Adding it up, AMZN is $357 million in the red since that first loss.
There are other numbers that are also disconcerting when it comes to AMZN.
While recent price-to-earnings ratios are hard to anaylze given the company's losses, Hoovers Company Information show a P/E ratio for AMZN at the end of 2013 reaching as high as a ridiculous 687.51.
Now, triple-digit price-to-earnings figures are typically a red flag when it comes to investing, but AMZN is not your typical company.
While Amazon is the kingpin in the online retail market, it has essentially become a growth stock. Its losses come as a result of long-term investments that are likely to pay off over years.
For example, Amazon has aggressively been reinvesting its profits in what Morningstar analysts have referred to as an "investment phase." It has been improving the functionality of the Kindle Fire, and offering it at a low price to make it a formidable player in the tablet market. It's expanded its product line with intriguing additions like Fire TV, the Fire Phone, and a mobile credit card reader.
The company has announced a new headquarters in China, supporting a more global expansion to take advantage of the fact that half the world's internet users come from emerging markets.
"This is the kind of thing growth investors have to deal with on a regular basis. The next leg up for a company means at least a few quarters of losses on a per share basis because it's expensive to ramp up," Money Morning Defense and Tech Specialist Michael A. Robinson said. "I don't think they know how long their build out is going to take, and so they intentionally leave earnings reports and calls vague to give some wiggle room."
That's why if you're looking for a bargin stock that has long-term growth potential, you shouldn't be in a hurry to snap up AMZN stock.
In fact, Robinson said he'd like to wait at least another quarter to see where the company is headed, and whether it's going to begin seeing more black ink to offset all the red.
What this does mean is right now presents an opportunity to short Amazon stock ...
AMZN as a Short Sell
Amazon's appeal as a short comes down to investor uncertainty. Investors are - and have been, before the record-high losses - skeptical over whether these aggressive growth measures will flow to the bottom line.
The next chance investors have to see if Amazon's growth tactics have paid off is in January 2015, when Q4 2014 earnings come out.
The fourth quarter is typically the most profitable for the company - but even this performance is uncertain. Last year AMZN grew its bottom line numbers by 145% to $240 million. This was its most profitable Q4 since an impressive 2010 when it topped out at $415 million. This year AMZN expects operating losses in Q4 between $430 million and $570 million.
And analysts are across the board on Amazon Q4 earnings estimates. With 32 analysts reporting, according to Yahoo! Finance, the estimates range from a Q4 earnings-per-share as high as $0.50, but as low as a loss-per-share of $0.41. The average estimate is an EPS $0.16, which would be AMZN's lowest Q4 EPS figure since 2002.
But investors are quick to panic. Any indication that the company is continuing to lose money, especially in its most historically profitable quarter, is going to prompt an AMZN stock sell-off in Q1 2015.
For example, after missing earnings expectations for 2013's fourth quarter, AMZN stock saw its biggest single-day drop since Nov. 2008. On Jan. 31, shares tumbled 11%, from $403.01 to $358.69, or a $44.32 loss.
And this was in a report where Amazon was in the black, posting $240 million fourth quarter profit to Q4 2012's $98 million. That AMZN drop contributed to a 27% slide that occurred from Jan. 17 to May 9.
Plus, the charts are not in AMZN's favor right now. Its 50-day moving average has been below its 200-day moving average now for more than 140 trading days, and the gap hasn't closed substantially to support a run at $360 - which Money Morning Capital Wave Strategist Shah Gilani said is a key level.
And it doesn't look oversold either, at least by Relative Strength Index indicators. Typically, an RSI of 30 signals that a stock is oversold and at 70 it indicates that is overbought. The current RSI data show it nearing 70, buoyed by a rally in the last week that has propelled shares about 6% to $323.05 as of market close yesterday (Monday).
Gilani says there is no floor to AMZN stock losses. Unless it reestablishes itself above the $360 level, it could be in for some trouble. This is despite its growth prospects.
"I could go on and on about some of the great things Amazon is doing, but they're not translating into profitability," Gilani said. "They may over time, but the market isn't going to give Amazon's stock time when the sell-off comes."
More on E-Commerce: It looks like Amazon.com isn't your best bet if you're looking to make quick gains on the e-commerce sector. But while AMZN is a potential short, here's a company you can bet on in the sector ....