Amazon (NASDAQ:AMZN) has a stock price of nearly $268 and trades at a price to book ratio of 14.9, primarily because investors continue to believe that it can maintain an annual revenue growth rate of over 20%. Some analysts warn that Amazon is losing money, is too expensive, and that the stock will crash if the company ever misses growth expectations. Others believe that if the company does not improve margins and grow earnings, that investors will lose patience and abandon the stock. I understand the excitement about Amazon, but I view its stock with a high degree of skepticism.
Amazon should have record fourth quarter revenues and its move into non-retail businesses should help to improve its margins. One trend that is working in Amazon's favor is the increased use of online retail websites. According to National Retail Federation data, 27% of consumers shopped online on Thanksgiving, and 47.5% shopped online on Black Friday. Also on Thanksgiving, online sales rose by 17.4% from a year ago and Black Friday's online sales were up by 20%. In addition to that, on Cyber Monday, online retailers racked up a record $1.5 billion in sales, and according to IBM (NYSE:IBM) sales increased by 30.3% from 2011. As the preeminent online retailer, this was great news for Amazon.
One interesting bit of data that came out of the Thanksgiving weekend sales reports was that the percentage of consumers using mobile devices to order from online retailers was up 28%. The interesting theme that came out of the increase in orders from mobile devices was that many of the orders were made from Apple's (NASDAQ:AAPL) iPads. Apple and Amazon have been viewed as competitors because the iPad and the Amazon Kindle compete for some of the same customers. However it is obvious that, "Apple devices dominated mobile shopping traffic, helping Amazon extend its e-commerce dominance." The iPad continued to generate more traffic than any other tablet or smartphone, driving more than 7% of online shopping. This was followed by iPhone at 6.9% and Android 4.5%. The iPad accounted for 90.5% of tablet traffic on Cyber Monday, and the top online destination was Amazon.com. It seems that Apple and Amazon have formed an unofficial partnership from which both companies benefit.
A second factor that could boost investor's confidence in Amazon's ability to maintain its stock price is that it has begun to branch out into higher margin businesses. A survey by research firm Forrester, found that in the third quarter, 30% of U.S. online shoppers began researching their purchases on Amazon.com. compared to 13% who began their search on Google (NASDAQ:GOOG). This change in consumer shopping habits opened up an opportunity for Amazon to sell advertisements for products that it does not actually market. Amazon now plans to establish "itself as a starting point for consumers looking to buy something on the Web."
Amazon has also made inroads into the online service business, "hosting data storage and computation for hundreds of companies, including Netflix, Instagram and Pinterest." Amazon began its Amazon Web Services division (AWS) business six years ago, and it has grown dramatically. Amazon has big plans for its AWS division. Andrew Jassy, who heads the division said, "we believe at the highest level that A.W.S. can be at least as big as our other businesses."
Amazon's other businesses recorded nearly $50 billion in revenue last year. Mr. Jassy thinks A.W.S. is probably less than 10% of its eventual size. Amazon estimates that its AWS division will bring in about $1 billion this year.
On December 27th, a report out from ForeSee says Amazon has taken the No. 1 spot in a survey of online shoppers for customer satisfaction while Apple Inc. had its worst showing in four years. Amazon has held the highest score for eight straight years, probably because of its wide variety of merchandise and the ease of using its site.
A recent outage at one of Amazon's web service centers in Virginia prevented millions of Netflix (NASDAQ:NFLX) customers in the United States, Canada, and Latin America from watching movies and television shows on Christmas Eve. Netflix has 30 million users worldwide and 27 million users in the affected regions. This is the fourth time this year that Amazon's Virginia data center has had an outage. If this continues, it could steer business towards AWS' competitors Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ).
Amazon's stock has been on an amazing run. It is up by 43% over the last 52 weeks, and based on the Thanksgiving weekend results, it could move even higher when it reports earnings on January 31st. I also applaud the moves that the company is making towards advertising and online services. However, I cannot recommend buying stock in a company that has low margins (operating margin 0.93/profit margin 0.07) and amazingly high stock multiples (price to earnings ratio of 2,959 and price to book ratio of 14.91). Amazon is better suited for speculators than for long-term investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.