Amazon the Disrupter

By Malcolm Berko

April 27, 2016 5 min read

Dear Mr. Berko: Last December, I paid $692 a share for 300 shares of Amazon.com because my stockbroker said it would go to $1,000 and then split 5-for-1. It's now $622 a share. The loss upsets me, but I think I can handle it. My question is: Do you think this stock can return to my purchase price soon? — MS, Jonesboro, Ark.

Dear MS: Maybe!

Good golly, Miss Molly! Anyone who'd buy Amazon at $692 a share, or 550 times earnings, has to be a bit sozzled or smoking a few of those left-handed Lucky Strikes. Admittedly, Amazon's sales growth during the past 10 years, from $8.5 billion to $107 billion, has been breathtaking. CEO Jeff Bezos certainly knows how to generate revenues.

Amazon.com (AMZN-$622.42) is a textbook example of a disrupter, or what economist Joseph Schumpeter called an instrument of creative destruction. This is the concept by which new ideas and processes bring about the demise of old ideas and processes. AMZN's low prices, its super-quick delivery system, its fast, efficient, courteous self-service and its unique supply chain have turned the retail industry into a battle ground for survival. Major chains such as Macy's, Office Depot, Aeropostale, Barnes & Noble, Wal-Mart, Target, the Gap, Wet Seal, Deb Shops, American Eagle and others closed over 6,000 locations last year.

Though Jeff knows how to generate revenues, he seems to lack the ability to maneuver those impressive revenues into respectable profits. Jeff has turned Amazon into a leading cloud service provider, and as a result, Amazon Web Services grew its revenues by 70 percent in 2015. But while competitors enjoyed profit margins between 23 percent and 30 percent, Jeff seemed happy as a lord with a 4.3 percent profit margin. Last year's cost to fill numerous orders exploded by 26 percent, and spending on new technology jumped 40 percent. Thirty years ago, few of us would have imagined that success in the retail business would be dependent upon technology.

Last year, AMZN earned $596 million on $107 billion in revenues — a niggardly 0.6 percent net profit margin. Recently, when braced about this impecunious return, Jeff suggested that huge profits will be there in the long run — after AMZN's successes at creative destruction have driven competitors from the marketplace. However, a stock that can move up and down 100 points in a week or 40-plus points in one day fails to float my flotilla.

AMZN's fundamentals remain strong, but it's gutsy to speculate with a stock that trades at 432 times earnings. If Jeff stubs his toe and earnings or revenues miss their mark just by a tad, this stock could collapse like a sinkhole. Then he'd need a really big tow truck to pull AMZN back up. At this level, investing new money is very iffy, and it's going to take a lot of new investors to get AMZN back to your $692 basis. I don't see a $692 price in the near future and suggest you sell AMZN and lock in your loss. Frankly, if you kept your shares, your loss could quickly and unexpectedly become much larger.

On the flip side, product and quality acceptance, geographic expansion and Prime memberships continue to gain momentum for Amazon. So with overseas revenues accounting for 38 percent of sales, AMZN believes that it can earn between $4.18 and $8.57 a share this year on anticipated revenues of $130 billion. Wall Street is bullish on the stock. Piper Jaffray, Barclays, Deutsche Bank, SunTrust and others recommend AMZN as a "strong buy." Unlike Facebook, Google, Microsoft, Apple and other popular high fliers with billions of shares, AMZN only has 485 million, and Jeff owns 84 million of them. And some of the largest and most popular mutual fund families — e.g., Fidelity, Vanguard, T. Rowe Price and American Funds — own 70 percent of the stock.

We are in a fickle market, and the AMZN sentiment is definitely bullish, but the risk factor is significant. Currently, your loss is about $21,000, and you said, "I think I can handle it." The operative word here is "think." Could you handle a $40,000 loss?

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

Photo credit: David Amsler

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