Amazon - Prevailing Conditions Don’t Spell Much of a Future

By Muhammad Bazil - June 15, 2012 | Tickers: AMZN, GOOG | 0 Comments

• Email
• Print

What do you notice from the simple table below?

Let me save you from the unnecessary battle of wits.

There is a high P/E ratio that has even receded and investors know what this means. Amazon (NASDAQ: AMZN) currently has one of the highest P/E ratios (a figure ranging at 180) in its industry. This can only mean that the market holds immeasurable expectations for Amazon.

There are few things that you have to take note of. There is the market and there is the system. The latter is the underlying factor while the former, in most cases, knowingly or unknowingly defies the existence of a system. For instance, the market says- expectations are high, the stock will rise. Let’s buy. On the flip side, the system dictates that when expectations are higher than usual, the incentive to buy is suffocated by increasing worries of a big fall in the case that expectations are not met.

This invites a bubbling dilemma. The higher the risk the greater the reward, so says the popular adage. Nonetheless, higher risks post positive results fewer times and in extreme cases post negative results far more often. In the case of Amazon, the risks couldn’t be any higher. The expectations have exceeded their rightful position and there is a possibility that the stock may fail to perform as expected.

Underlying investment principles defied

It is quite evident that investors have pumped in overwhelming amounts into Amazon. What is fuelling this expectation? In my opinion, buying into Amazon currently defies most basic investment principles.

First of all, its market share is under constant threat from the undergoing revolution. The two big wig tech players, namely Google (NASDAQ: GOOG) and Apple, have really stirred some ripple in the tech industry.  Facebook, a younger yet aggressive player, also seems to be disrupting the conventional flow of activity in the internet industry. This, therefore, places a lot of constraints on Amazon’s growth prospects.

Let me delve deeper into the growth constraints. Google has placed a speed governor on the over speeding Amazon Kindle in Europe. In digestible terms, Amazon Kindle (which by the way happens to be a key element in Amazon’s portfolio) will experience immense competition in Europe, more so in France. This is, of course, after Google announced a major deal for France publishers and writers. This deal which had been cast into the murky wastelands of legal limbo for six years will digitize most of France’s literary output. In my opinion, I believe that it may well beyond the borders of France and eat into Amazon’s market in other European countries.

Still not convinced on the limiting factors imposed on growth? Google has increased the tempo a few notches higher and is blatantly digging into Amazon’s market in broad daylight. If this was illegal, I am sure Google would get a life imprisonment. The ‘big G’ has not only embarked on a journey to suppress e-books in Europe but has also come up with a new way to secure a bigger market share in online shopping. This will be facilitated through the new trusted stores program. This program is primarily designed to observe and rate a seller’s shipping and service package. It will, therefore, create a lot of peace for buyers and in the process offset a bulge in the number of people who use Google to conduct trade.

From this concise capture, it is evident that growth is slowly turning its back away from Amazon. All the same, investors are still holding expectations. Blooming heck, the expectations are even bigger than those of Facebook. The social network has a P/E of 70. Why are Amazon investors defying fundamental principles of investing?

Monolithic confidence and downright conservativeness

Monolithic confidence cannot be stirred by the media. It is generated when some investors fail to draw the line between historic performance and growth speculations.

The conservativeness kicks in when most old school investors opt for Amazon and place unjustified confidence in it. They primarily base their outlook on historical performance and remain strong that it will grow. The main thing that they fail to realize is that new models of internet businesses are sprouting. With time, the harsh reality will dawn.

Verdict on Amazon: Go short, sell it.

• Email
• Print
• Feedback