Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member., Inc. (AMZN): This Stock Still Wildly Overvalued

You wouldn’t know it by the stock’s performance, but, Inc. (NASDAQ:AMZN) has actually missed earnings estimates for three straight quarters. Investors have looked past the misses because the company is growing, but Amazon can only play the “investing in the future” card for so long before it’ll have to prove it can make a profit. When the company reports first-quarter earnings on April 25, investors are only expecting a $0.09-per-share profit, and a miss of this low bar could send the stock crashing.

There are a few red flags for investors interested in Amazon, and soon we’ll find out if those issues got worse in the first quarter or began improving.

The growth engine is slowing
One of the major challenges for, Inc. (NASDAQ:AMZN) is that growth is slowing. Normally, this is when investors would begin demanding profit to pick up, but thus far Amazon has gotten a pass.

AMZN Revenue Quarterly YoY Growth Chart

AMZN Revenue Quarterly YoY Growth data by YCharts.

Revenue is only expected to grow between 14% and 26% in the first quarter, so there’s a strong likelihood the decline in growth shown above will continue. Amazon is starting to fight the law of large numbers, finding it harder to find growth on a relative basis even if the numbers are strong on an absolute basis.

Can you make money giving away shipping?
I’m an Amazon Prime user and I love the service the company provides. But I love it because I can buy absurdly cheap items and get them shipped to me for a one-time annual fee that comes with other goodies like streaming video. It’s this free shipping that has become an issue for Amazon.

To give you an idea why it’s a concern, yesterday I bought an item for $5.66 and right now Amazon is shipping to me from Hong Konk — for free! There’s no way that purchase has a positive gross margin for Amazon, and it’s just one example of why the company is barely profitable at its core business.

In 2012, fulfillment costs were 10.5% of sales, up from 9.5% in 2011. This general trend upward doesn’t show any sign of stopping as it pushes customers toward a shipping-included model., Inc. (NASDAQ:AMZN)It’ll be interesting to see where margins are trending this quarter and if shipping costs continue to eat up a growing portion of sales., Inc. (NASDAQ:AMZN) is trying to fight the higher shipping costs with more distribution centers closer to customers. So far, that hasn’t helped the numbers.

Low-margin businesses
The core problem I see for Amazon is that it competes in fundamentally low-margin businesses. Online retail, cloud computing, and streaming video have price pressure and cost pressure, which means razor-thin margins. In tablets, Amazon has said it will sell devices at no margin in the hopes of making money on the back end. This compares to a wildly profitable model for Apple Inc. (NASDAQ:AAPL), which makes money on devices and the back end.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.