Question

What are the pro's and the con's of investing in Amazon?

Answer 1

It can be a real struggle for cautious investors when it comes to dealing with Amazon.com Inc.

Certainly AMZN stock has delivered terrific returns, outperforming even during this insane bull market. So what is a value investor to do with this mold-breaking company? Are growth investors not seeing risks, or do they just not care?

AMZN stock presents a challenge for The Liberty Portfolio, my stock and options advisory newsletter, because it doesn’t conform to its low-risk approach, but it does have the hallmarks of a great company that should arguably be a core holding.

So here are a few pro and con arguments to determine if buying AMZN stock is right for you.

Pros

• Profit can be switched on and off. Unlike virtually any other company, CEO Jeff Bezos can simply put the brakes on various initiatives and allow AMZN stock to show a profit. His approach is to soak up revenue, generate massive cash flow to plow back into the business, and let the many avenues he’s developing come to complete fruition.
• It’s the definition of disruptive. Amazon has repeatedly proven that is can disrupt just about any existing business it truly sets its sights on. This means that, over time, it could become the superstore to beat all superstores.
• Scale means pricing power. Amazon can theoretically begin lifting prices in certain areas once competition has been pounded out of existence.
• Significant price appreciation over the long term. I expect that AMZN stock price will significantly correct at some point, perhaps when the overall market does. Over the very long term – 30 years – Amazon stock will likely prove to be one of the great investments of our time. It will be a “hold forever” kind of stock.
• It’s a de facto It is reasonable to say that Amazon.com stock is essentially a monopoly, with a 44% ownership of the entire U.S. e-commerce market. That’s right. 44 cents of every dollar spent online in this country gets eaten up by Amazon.

Cons

• It’s insanely overpriced. By most metrics, Amazon stock is very expensive. Amazon stock can be valued on a price-to-sales ratio. In the past, that has hovered around 2.2. However, it is now closer to 3.8 today. Combined with a market that is itself 30% overpriced, there is a real possibility for a significant decline in AMZN. Certainly there is an argument that Amazon.com stock price, along with the other FANG stocks and momentum plays, are all part of a bubble that will pop.
• Volatility = Worry. Owning a stock that has soared the way Amazon stock has is not for the anxious investor. A huge decline could come in a heartbeat. Investors who are not prepared for such volatility will have a hard time owning the stock.
• It isn’t different this time. The opposite view of above is that AMZN stock might not necessarily be able to generate a large enough profit to justify its price tag. Once shareholders decide that profits do matter, AMZN may not be able to produce them quickly enough and the stock might decline.

I think, if push comes to shove, Amazon stock does belong in a long-term diversified portfolio. I think there is a lot of risk buying it at these levels. My ideal situation would be to wait for a major correction, buy it as a small piece of a large portfolio, and hold for a very long time.