Are Amazon.com, Inc. (AMZN) Investors’ Hopes Riding on Hype?

The first of those is valuation. Investors sometimes say a stock is priced to perfection, meaning that any miss in earnings or revenue will be sure to send the stock in a tailspin. Well, Amazon.com, Inc. (NASDAQ:AMZN) is priced beyond perfection. It is untethered to any fundamental valuation. When it missed expectations last month, its shares rose. It seems to defy logic, and while Amazon investors are not complaining, its lofty valuation leaves it prone to a potential freefall.

The second key reason for concern is Amazon’s push to get more products to customers faster – and the costs that will come with it. A big reason Amazon lost money in previous quarters is that it has been investing in itself, building out its network of warehouses, or “fulfillment centers.”
This is key to the company’s strategy to offer a continually wider array of products and deliver them to customers faster. It now operates more than 30 fulfillment centers in the U.S. alone, and plans to open several more over the next two years.

This seems like a wise investment from a customer satisfaction standpoint, Amazon’s real strength. But the effect on Amazon’s cost structure could be significant. Those warehouses are not one-time expenditures. They are ongoing costs. I’ll direct you to a post by fellow Fool blogger Chad Henage, who explored Amazon’s growing headcount in this piece, and argued that Amazon is becoming more and more like a traditional retailer.

Let me sell you a story

Those fulfillment centers mean larger costs of production, which of course means narrower margins. If that’s what Amazon will deliver to investors in the years to come, it won’t be fetching the heavenly premium it has been. That doesn’t necessarily make Amazon.com, Inc. (NASDAQ:AMZN) a sell. But it makes it a particularly risky stock to own, especially at these lofty levels.

Investors in Amazon have to buy in knowing that, right now, they are investing in a stock where the story is more important than the fundamental underpinnings. And that story could change dramatically as numbers shape up in quarters and years to come.

The article Are Amazon Investors’ Hopes Riding on Hype? originally appeared on Fool.com and is written by John-Erik Koslosky.

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