Jeff Bezos, one of the wealthiest people in the world, owes much of his fortune to Amazon, which he founded in 1994 and still leads as its executive chairperson. The dominance of his company in electronic commerce and its continuous expansion across different sectors and industries provide an attractive opportunity for investors. This article explores and discusses the pros and cons or advantages and disadvantages of investing in Amazon stock.
Is Amazon Stock Worth the Investment? A Look at the Pros and Cons
Pros: Advantages of Amazon Stock
Amazon is one of the most valuable companies in the world. Its focus on innovation and expansion to drive long-term growth has been demonstrated in its evolution from an electronic commerce website serving as an online storefront to a well-rounded tech company. In fact, as a testament to its reputation, the company is one of the Big Tech companies in the United States alongside Alphabet, Apple, Meta, and Microsoft. The following are the specific advantages of investing in Amazon stock:
• E-Commerce Dominance: The company dominates electronic commerce in most parts of the world such as in North America, South America, Europe, and the Near and Middle East. It is the largest online retailer in the world and has an emerging presence in Asia and the Pacific to compete against prominent regional players. It has a massive consumer base thanks to its expansive product offerings. Its e-commerce site has become a one-stop online shop for consumer-end goods and services.
• High Barriers to Entry: Entering and dominating the e-commerce market are tough tasks to accomplish. Established companies have time-honored supply chains, inventory management, and distribution capabilities on top of their established consumer bases. A new entrant or small company can venture into e-commerce but competing at the same level as large e-commerce retailers would require substantial resources needed to develop and implement capabilities and raise widespread brand awareness.
• Diversified Business Interest: One of the biggest strengths of Amazon is that it has expanded beyond electronic commerce. It is a provider of cloud computing services, a publishing and multimedia organization, a designer and manufacturer of consumer electronics devices and computer hardware, a satellite internet service provider, and traditional retail, among others. Investing in its stock means investing in its diversified business interests across different sectors and industries.
• Strong Business Leadership: Another advantage of investing in Amazon stock is the proven business acumen of its business leader. Bezos is a visionary leader who has assembled a strong management team capable of innovating, maximizing available growth opportunities, and identifying market and consumer trends. Investing in this company means acknowledging the capabilities of its executives and depending on their capabilities to drive the organization further forward
• Long-Term Growth Commitment: The company has a strong culture of innovation. Remember that it has diversified its business beyond its electronic commerce. The company has pursued research and development to introduce new goods and services or improve its existing products. It has also ventured into numerous acquisitions to build its capabilities in newer markets. The company is willing to experiment with new technologies and ventures as part of its long-term growth strategy.
Cons: Disadvantages of Amazon Stock
Investing in Amazon stock could coincide with a growth-centric investment strategy. However, while others consider it a growth stock, some analysts consider it a value stock, and investing in this company means adhering to the principles of value investing. There are those who consider it as a hybrid of both because it features some of the pros and cons of growth stocks and the advantages and disadvantages of value stocks. The following are the specific disadvantages of investing in Apple stock:
• Concerns Over Valuation: The stock price of Amazon is considered high. Some analysts and investors think that it is overvalued due to its high earnings multiple and forward earnings multiple. The earnings multiple of the company is more than 100 percent higher than notable stock indices such as the S&P 500. An overvalued stock tends to be more vulnerable to the impacts of an economic downturn or when the market corrects itself and the stock falls back to its intrinsic value.
• Expensive and Volatile Stock: Amazon stock is more expensive than some large-cap stocks. Adding to this is the fact that its stock price has been considered by some as overvalued or speculative. It is also volatile. This volatility stems from different factors including the possibility that the stock price is indeed overvalued, slowdowns in its more-recent growth rate, disappointing revenue forecast, and increasing competition due to diverse exposure to different sectors, industries, and markets.
• Threats from Competition: The company faces different competitive forces due to its diverse business. This is another disadvantage of Amazon stock. The substitutes to its online retail business are traditional brick-and-mortar retail stores while alternatives include other electronic commerce companies with a regional presence or focus on niche markets. Most of its other businesses and products also have alternatives and substitutes that raise the bargaining power of suppliers and consumers.
• Notable Competitors of Amazon: Some of its businesses compete with more established companies. Amazon Prime competes with other streaming services providers such as Disney Plus and Netflix and Amazon Music struggles to compete against Spotify and Apple Music. Kuiper Systems compete with SpaceX. The consumer electronics division of Amazon competes with Apple, Google, and Microsoft while its e-commerce business competes with tech giants such as eBay and Alibaba.
• Risks Involving Regulation: The company has been dealing with legal and regulatory issues both in the United States and in other countries or jurisdictions. These include the use of private data, antitrust issues or anti-competition actions, infringement of intellectual property rights including patent violation, and questionable advertising practices. Regulatory risks can lead to reduced operational capacity or diminished earnings while threatening the future growth prospect of the company.