Throughout the last decade, Amazon (AMZN) has been one of the biggest success stories in the technology industry, which has helped it rise leaps and bounds in the stock market. 2012 was no different, as Amazon went on a red hot run gaining over 40%, and it recently hit a 52-week high. Yet despite this success, there are several reasons for investors to be careful with Amazon.
Both operating and net profit margins have been constantly falling over the past few years for Amazon. In the quarter ended June 2012, Amazon generated $12.8 billion in revenues, yet the net profit was a paltry $37 million. The situation got even worse in the recently declared results of the quarter ended September 2012, which became the first quarter in a decade in which Amazon reported a loss. Amazon's profit margin of 0.07 percent for Q4-2011 to Q3-2012 is the lowest amongst all of the profitable companies in the S&P 500. Since March 2010, when Amazon's profit margin was 3.83 percent, it has continued to decline. The current bull run is under severe pressure from the financials of the company, and it could easily lead to a decline of the stock.
The charts below show the Operating and Net Margin for the last 10 quarters and the decline in clearly visible. Eventually, this data is likely to catch up with the stock, and Investors are likely to pull out of such a stock that keeps reporting poor profit figures consistently. Additionally, with the company bearing additional burden of interest payments from a recent bond issue, its financial woes are not likely to be healed anytime soon.
A large part of the reason for these poor financials is the company's rapid diversification, to which the company has admitted. By moving into a variety of areas, such as cloud computing, video on demand, and electronics, Amazon has been unable to master anything, and is falling behind companies that specialize in these distinct areas. In the wake of this competition, Amazon has had to resort to selling products at a loss or with special offers, in order to beef up sales numbers. If this trend continues, it seems possible to see Amazon posting negative operating profits in the near future.
Take for example the electronics market: in this market, Amazon has produced the Kindle, but is facing stiff competition from both Apple (AAPL) and Google (GOOG), and the Kindle will continue to battle these competitors. With Apple recently releasing the iPad mini, there is now even more competition with the Kindle. With so many other companies also entering this market, this will be a continuing struggle for Amazon.
As another example, Amazon also has a video service, which competes with the popular service Netflix (NFLX). Amazon has tried to make its presence felt by striking a deal with Time Warner (TWC) and more recently A&E Networks to add more content to its Prime platform, but the service has still failed to achieve the hype and success Amazon was hoping for, and the expenses are piling up. Though it remains to be seen if Amazon actually makes profits on this content, the company will need to keep investing if it is to match Netflix, which will prove to be an expensive undertaking.
Amazon's core business - online shopping - is what made it so successful years ago. With such a large portion of this online shopping market, Amazon was set to become one of the biggest retailers in the world, and still is on that track. However, the additional services, products, and offerings are only taking away from this core business. Amazon is moving away from its core values and specialties, and this may prove harmful in the end.
Amazon's expenditures have been on the rise, as the company is trying to gain market share in new businesses and raise revenues. However, these higher expenses are outpacing revenues, and are costing the company in earnings. We have now seen Amazon post losses, and its huge expenditures might take its toll on the company in the form of drop in stock price very soon.
All of these prevailing issues for Amazon make it an ideal candidate to be shorted in the market. With the stock gaining nearly 40% in the last year, and its financials showing weakness, a correction seems likely in the near future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.