E Amazon: Fantastic Growth, But Not A Buy Right Now

Amazon.com (AMZN) is arguably one of the most successful business stories in the history of America. The company started out with humble beginnings as an online bookseller and is now a diversified technology conglomerate with a number of huge businesses across Internet retail, grocery stores, health care, media, and more.

It is no surprise that Amazon has captured the attention of investors, both large and small. Multiple institutional investors—often referred to as the “smart money”—have created huge positions in Amazon. One of them is Melvin Capital Management a $13 billion fund that seeks superior risk-adjusted returns by using a long-short equity strategy, among other securities.

Melvin’s largest position by a wide margin is technology giant Amazon. But investors should never blindly follow the holdings of a hedge fund. It is always important to do your own due diligence, part of which is an assessment of the individual’s risk tolerance. We see Amazon stock as significantly overvalued today and recommend investors avoid the stock at the current price, despite the company’s high growth rate.

Growth At An Unreasonable Price

Amazon is one of the largest companies in the world, sporting a $1.55 trillion market capitalization. This size and scale affords it certain benefits when it comes to competing in a global marketplace. The company continues to generate huge growth. In the 2020 first quarter, Amazon generated $75.5 billion in revenue, above prior guidance of $69 -$73 billion, representing a 26.4% improvement compared to Q1 2019. This result was driven by a 22.0% increase in product sales and a 32.2% increase in service sales.

 Notably, service sales made up 44.5% of all revenue. Operating income equaled $3.99 billion, down from $4.42 billion in the year-ago period, but within prior guidance of $3.0 -$4.2 billion. Net income equaled $2.54 billion ($5.01 per share) compared to$3.56 billion ($7.09 per share) in Q1 2019. Amazon also provided guidance for the second quarter of 2020. The company expects Net Sales of between $75.0 billion and $81.0 billion, indicating 18% to 28% growth, along with Operating Income of -$1.5 billion to +$1.5 billion.

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William K. 1 year ago Member's comment

When the giant crunch hits most folks will not be able to afford anything that Amazon sells. And in addition, there will probably be some little problem that de-rails the momentum of the share price rise. Probably not the sort of thing that any would suspect.

Kurt Benson 1 year ago Member's comment

Not so sure. I think $AMZN still has room to grow.

Alexa Graham 1 year ago Member's comment

I sometimes wonder if there will ever be a limit to how high $Amazon will climb! $AMZN