Amazon (AMZN) shares continue their spectacular rise, as seen in a feel-good stock chart, giving holders a good year’s worth of gains in the handful of weeks since the online retailer reported a third-quarter loss and said it might also lose money in the fourth quarter.
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Is it a momentum stock, going up because new investors buy in because it’s going up? Is it a new paradigm stock, attracting brainy investors because Amazon has upended the retailing landscape? Or is it simply what passes these days for a growth stock (see YCharts coverage of Salesforce.com), attracting investors because its sales, if not its profits, keep rising at around a 30% clip? (One has to have profits to have a profit margins.)
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It’s probably all three, as it’s doubtful a single group of true believers could have pushed the Amazon rock up this steep hill. Nice work, people. The company will in the weeks ahead report fourth-quarter results. It earlier projected a sales gain for the period of between 16% and 31%, and a bottom line somewhere between a $310 million profit and a $490 million loss. That’s called wiggle room.
We’ll leave the momentum people and the growth-stock people to their happiness, so long as it lasts. But you new-paradigm people: how does Jeff Bezos turn this thing into a profit machine? Given that his sales growth is largely due to discounting (free shipping is discounting, too), even running Best Buy (BBY) out of business doesn’t seem likely to allow Amazon to start charging more for everything. Sales tax collections loom in some key states and that will either slice margins or force Amazon to raise prices, which would hurt sales growth.
And what about the Bezos hiring spree, which has send sales-per-employee plunging?
Obviously, you aren’t valuing Amazon shares on recent results, or you'd have to explain this wacky PE ratio.
Sure, Kindle is cool and selling them at no profit seems smart as it expands the group of consumers who might pay to download some stuff from Amazon. No shipping costs there. But that, too, seems a brutally competitive space, also occupied by Apple (AAPL), and one in which margins could be squeezed as content owners move to gain a bigger share of profits.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at email@example.com.
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