Amazon Is Way Too Risky For Your Portfolio

Sep.27.12 | About: Amazon.com, Inc. (AMZN)

Amazon (NASDAQ:AMZN) is a very unique company that has enjoyed tremendous growth. The company's growth has been based on its technology and dominance of the cloud retailing industry. Amazon has been able to use the public cloud to sell more products at a cheaper price than anybody else. For the non-tech savvy, the cloud can be accessed through a web browser or a light-weight desktop or mobile app. This means that anyone from an individual with an old-style desktop computer to a techie with a top-of-the-line smartphone can utilize Amazon's website.

Amazon sells products ranging from tablet computers to jewelry and clothing to diapers. The growing use of technology by shoppers has allowed Amazon to sell these products to a wide range of shoppers and to compete with the best-known retailers in the world. Retailers like Wal-Mart (NYSE:WMT), Sears Holdings (NASDAQ:SHLD), and Target (NYSE:TGT) are feeling the effects of Amazon's emergence. Jeremy King, Wal-Mart's chief technology officer, lamented his company's concern when he said "Amazon is always in our sights."

Five years ago, Wal-Mart did not have to worry about Amazon, but a recent survey revealed that as of today about 50% of Wal-Mart's customers have also shopped at Amazon. Retailers do not only have to worry about how much market share Amazon is taking from them right now, but also about how can they keep up with Amazon in the future. Jeremy King conceded that Amazon had a huge head start in the online retailing business when he said, in regard to Amazon, that "my biggest issue is playing a catch-up game."

Amazon is the first large cloud retailer and emerging technologies have give Amazon some real advantages. For instance, many shoppers will visit bricks-and-mortar stores and then use their mobile communication device to compare the store prices against Amazon's prices. Amazon will usually win these price comparisons because Amazon does not have the overhead cost of bricks-and-mortar stores, and its customers do not have to pay sales taxes. Tech-savvy customers (of which there are many) have now begun to use a shopping strategy called "scan and scram." This is a strategy were "would-be customers use their smartphones in stores to scan an item's bar code and then buy it online from a rival merchant." The scan and scram shopping strategy has been particularly hurtful to relatively big ticket technology retailers like Best Buy (NYSE:BBY).

Big retailers are also wary because of Amazon's growth. Since 2007, Amazon has grown revenues by 325% from $14.8 billion in 2007 to $48.1 billion in 2011. What Amazon investors find exciting is that the company is still growing revenues at a rapid rate. In the second quarter, the company increased its year-over-year revenues by 29%.

Recent Amazon News

On Sept. 25, "Nasdaq and Amazon Web Services join[ed] up to offer Wall Street firms a service that will enable them to store key regulatory data on the latter's cloud infrastructure. The partnership, which should allow clients to sharply cut costs, marks Amazon's boldest foray into the financial sector, although security concerns could stymie growth." This is another example of how Amazon has used the cloud to drive revenues.

On Sept. 21, Amazon announced that it is "planning to enter the Brazilian e-commerce market. Brazil accounted for nearly half of MercadoLibre's Q2 revenue, with sales growing at a 36% year-on-year clip. Also, Deutsche launched coverage with a hold, declaring shares 'fairly valued' at current levels."

Also on Sept. 21, Amazon's Kindle e-readers will finally arrive in Japan in early October, the Nikkei reports. "Amazon, which just refreshed its Kindle line, has been held up by a failure to reach deals with top Japanese publishers, but some have come around this year. Local e-commerce giant Rakuten gave the Japanese e-reader market a needed lift earlier this year by launching the $100 Kobo Touch, and should remain a tough competitor for Amazon."

All of the recent news indicates that Amazon is consistently and successfully opening up new sources of revenues.

Conclusion

Amazon is doing a great job of increasing revenues, and high expectations for future revenue growth is the reason that it has achieved a price-to-earnings ratio of over 200. But, despite Amazon's growing revenues its stock price is only up by just 8% over the last 52 weeks.

I think that the reason why the stock price has not moved higher is because of investor concerns about Amazon's low margins and relatively flat earnings. In order to sell its products for less than its competitors, Amazon has reduced its operating margins to 1.17% and its profit margins to 0.69%. This means that while Amazon is growing revenues, it is not growing income. In the last quarter, Amazons year-over-year revenues decreased from $191 million to just $7 million.

Amazon's Founder and CEO Jeff Bezos is taking a big risk. He has made the company's growth rate more of a priority than its near term profits. If Bezos is wrong or if the company misses a revenue estimate, the stock price will almost certainly crash. I like the idea behind Amazon's cloud retailing business model, but with a profit margin of 0.69 and decreasing profits, this stock is risky and I would not buy it at this time.

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.