This Stock Can Make Or Break You

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amazon.com (NASDAQ: AMZN) founder and CEO Jeff Bezos never had a doubt about his company’s potential.

In the event you’re not familiar with the story, Amazon was one of the most hated companies on Wall Street in the early 2000's. It seemed as though every analyst determined it was only a matter of time before the company failed.

At the same time, Bezos continuously stated that he was highly confident in the company’s future prospects. It was almost as if Bezos had major plans beyond what anyone else knew.

And here we are today--analysts love the stock and Bezos has proven to be one of the most brilliant businessmen of our time.

The questions now are:

1 Can Amazon continue to grow?

2. Is this a good entry point for an investment?

3. Is a better investment option available in the space?

Pedal to the medal

Amazon doesn’t hesitate to spend money in order to fuel growth. However, this isn’t a negative because it’s a low-cost operation. Amazon seems to be capable of growing revenue at will. The problem is the bottom line.

Earnings have declined over the past two years, and the company reported a loss in 2012. Three of the last four quarters have been profitable, but for a company that has seen stock appreciation of 34% year-to-date and 150% over the past three years, that’s sub-par. Of course, growth stocks can perform very well while reporting losses thanks to momentum, but it’s usually not sustainable. Perhaps Amazon is different.

A cloudy future

Amazon is consistently making progress in cloud computing. By offering more affordable and efficient options than peers, Amazon has become a major player in the space. It recently won a $600-million contract with the Central Intelligence Agency, which International Business Machines (NYSE: IBM) was none too pleased about.

IBM recently acquired SoftLayer Technologies and CSL International in order to help give it more ammunition versus Amazon. It’s likely that Amazon will win more government and big-business contracts in the future, which will tread on IBM’s territory. Put simply, Amazon is likely steal more market share.

Amazon vs. peers

IBM’s revenue declined in 2012 after two years of gains. Fortunately, earnings have continued to improve, but this has been in large part due to cost-cutting measures. On the bright side for IBM, it consistently delivers large profits, it sports a profit margin of 15.5%, and it yields 1.9%. Comparatively, Amazon’s profit margin is a measly -0.1%, and it doesn’t offer any yield. Amazon is also trading at 96 times forward earnings, whereas IBM is trading at just 11 times forward earnings. 

Oracle (NYSE: ORCL) has seen consistent top- and bottom-line improvements over the years, but top-line growth has slowed. Oracle is strong in software, and it’s phenomenal at updating its technologies in order to put itself in a competitive position for future industry trends.

You might have seen an Oracle ad online, which states that its Sparc t5 offers 2.6 times better performance than IBM’s 7+ AIX. To rub it in, the Sparc T5 costs $299,000, whereas the 7+ AIX costs $805,000.

IBM seems to be losing some momentum on Wall Street, and the general public isn’t too pleased with its relentless outsourcing to India, which takes jobs away from Americans.

Getting back to Oracle for a moment, it sports a very impressive profit margin of 29.4%, debt management is excellent (as always), it yields 1.5%, and it's only trading at 10 times forward earnings. This, combined with consistent top- and bottom-line growth, as well as top-notch innovation, should lead to it outperforming the market over the next several years.

Conclusion

Amazon will continue to grow; that’s a near certainty. On the other hand, if the company can’t grow the bottom line, then it’s only a matter of time before someone says, “Hey … wait a second.” In the current market environment, it doesn’t matter, because everyone is chasing growth. However, when the broader market reverses course, Amazon will be a dangerous investment.

This isn’t necessarily a negative if you’re not yet involved. A drop in the stock price will present an opportunity to invest in a great company, but you might want to consider getting involved slowly. When high-multiple stocks run out of steam, they often take a long time to recover.

In short, Amazon looks to be a good long-term investment, but this could be a dangerous entry point. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com, International Business Machines., and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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