Amazon.com: Should we follow our brain or heart?

Amazon is a great company it is poised for more success, as success begets success.
Since its IPO in 1997 Amazon’s share price increased by an astounding 45,965% or a CAGR of 36%. In other words, a hundred dollar invested in 1997 is worth USD 46,064. Although the net income was mostly negative across the years Amazon, must have been doing something right to command such returns.

“The everything store” as Amazon likes to call itself started as an online bookshop that transformed into a Media, IT and retail giant and it’s all thanks to Jeff Bezoz’s  audacious and relentless dream  along with his team to create a multinational brand that has customer service and customer satisfaction at its heart.

Now let’s list the things that have worked for Amazon.

1. Today  Amazon is the leader in the E-book market  thanks to Kindle, Amazon raked in USD 12bn from Kindle alone
2. Amazon prime subscription is building strong brand loyalty. Services such as free delivery and 1 hour delivery have boosted subscribers. Based on the letter to shareholders Prime Members increased 51%.  Member in prime are in the 10s of million across the world according to Amazon data
3. Amazon is opening online stores in Key markets such as India; the sheer population alone and its position in Asia will drive amazon’s growth for years to come.
4. Amazon Web Service (AWS) continues to gain traction and analysts are estimating that AWS alone is worth USD 160 bn and growing.
5. Echo is a new innovation that could be the center piece of the internet of things revolution, Amazon did not release actual numbers however they announced that in 2016 echo sales were 9x last year’s sale. If echo managed to position itself as a centerpiece conducive to the internet of things, Amazon will capitalize on a relatively new market.
6. Human resources and management skills, despite being a behemoth Amazon prides itself  as being run as a startup, the teams are usually small and they are free to experiment new ideas while other tech giants tend to acquire  startups and try to integrate the startup in its own work environment thus  usually leading to atrophy and failure.
7. As mentioned earlier research and development is the cornerstone of Amazon’s growth. In 2015, USD 12.5 bn was spent on research and development while revenues for the year reached USD 107 Bn that’s more than the GDP of Morocco

Amazon’s numbers are inflated, its over-valued and it’s time to jump ship

1. Amazon Stock is overvalued,  The P/E ratio is around 183, while the P/E  ratio of S&P technology sector is at 22.2x and the S&P 500 P/E ratio is hovering around 20.8x. At around 183x investors are expecting that the bottom line will increase by 183% each year for the foreseeable future. looking back from 2012-2013 Amazon posted a negative net income in 2012 then positive in 2013 then back to negative in 2014 before posting USD 596 mn in profits in 2016
2. The share price grew at 36% annually since 1997. If this pace continues, Amazon’s market value will have to exceed USD 5 trillion by 2025 since the inception of S&P 500 and the Dow Jones index no company exceeded the USD 1 Trillion mark. Just to keep the number USD 5 trillion in context the 4^th largest country in the world in terms of GDP (Germany) has a GDP of around USD 3.5 trillion.
3. Amazon is a volatile stock  16 out  of the 20 years Amazon managed to produce a double digit draw down ( Stock decline post a new high) not  a large proportion of investors will be able to go to sleep at night with that kind of odds
4. Amazon’s share growth is a black swan event, trying  this kind of growth will deplete your portfolio in the long term. Even if you managed to find it, it will be a rare event for you to captured the whole 38,115% return, as, once the stock doubles or triples or even increase 10x you are more likely to book profits than wait!

Having a balanced view between the pros and the cons is one of the best ways to make an informed decision, that said regardless of my views on Amazon as an investment. I raise my hat to the commendable growth story of Amazon . In 1995 Amazon posted USD 511,000 in revenues 20 years later Revenues of Amazon reached USD 107 bn a growth rate of 195,000 times or an annual growth of 83%.  That said investors need to do their due diligence and research companies thoroughly, yes,  in hindsight an investment in amazon would have been the mother of all investments( if you invested near the start and sold today)  and would have been the golden ticket to financial security, however, one must remember that for every amazon there are thousands of busted companies and just to cite some examples  in efforts to ground you back to reality.

1. Webvan an online grocery delivery  was valued at USD 1.2 billion in 1999 the company  failed and closed shop in 2001
2. Etoys.com retailer was the most visited site for holiday shopping, in 1999 it hit an all-time high of $84 16 months later the stock  flopped and was deemed worthless
3. Blockbuster a home movie and game rental giant was worth $ 5 bn failing to innovate turned this success story from the front seats to bankruptcy court.
4. Geo cities a web hosting service had 19 mn unique visitors per month. In 1998, Yahoo purchased the company  for USD 3.6 bn in 1999 one year later  Geo cities ‘was no more’

The list goes on and branches into all business sectors, but since we were discussing technology stock we only mentioned tech flops or companies that flopped due to new technology. Investors that have booked some profits on Amazon can ride the bull, however, late comers beware.