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Overbought Amazon Could Be Running out of Headroom

Amazon.com (NASDAQ:AMZN) is one of the biggest tech success stories in recent memory. I’m not just talking about its e-commerce dominance or its recent traction with Kindle Fire gadgets, either. There’s the push into cloud computing storage, digital content distribution and other bright spots.

But after a red-hot run in 2012, Amazon has big risks ahead of it in 2013. And new investors should be worried about buying a top in AMZN as it approaches its 52-week high.

Here’s why:


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Flagging Earnings Estimates: Tom Brakke over at Research Puzzle posted a great look at earnings forecasts for Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) and Amazon stock just after Christmas. The estimates are losing ground for all of them, but most noticeably for Amazon.com. Check out the chart shown here and at Research Puzzle.


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Operating Income Down, Too: In reports, Amazon regularly states (near its margins breakdown, of course) that We believe that income from operations is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services.” OK, but a look at operating income isn’t inspiring, either. Income from operations has been steadily on the decline for two years. In fact, AMZN’s guidance predicts Q4 could be the second consecutive quarter of operating losses for the company.

Big Q3 Miss: Despite darkening forecasts, Amazon still missed the mark by a lot last quarter with a 60-cent-per-share loss. Sure, a lot of that was a writedown on its investment in LivingSocial, but even without that charge it would have fallen significantly short of the smaller 8-cent loss predicted. Looking forward, the picture was bleak, too, with Q4 revenue guidance lagging expectations.


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Can Nosebleed P/E Last Forever? According to Bloomberg, the cumulative net income for AMZN since it came public in 1997 is just more than $1.8 billion. The current market cap is almost 100 times that! And yet, despite softness in both earnings and operating income since 2010, shares have doubled. Right now, Amazon stock is flirting with a new 52-week high, and can beat the $264.11 set on Sept. 14 — before its earnings miss and ugly guidance in October — if it can add about 10 bucks. But how long will the market be willing to wait for sustainable profits even if revenue is simply stunning? How many more investors are left to bid this stock higher? How long can that exponential sales growth keep up to offset other concerns?

Amazon continues to prove a lot of naysayers wrong. AMZN was one of my biggest mistakes of 2012 when, roughly a year ago, I said Amazon’s stock was set to crash … and boy, was I wrong. Shares tripled the market with a gain of about 46% in calendar year 2012.

But I have to scratch my head again after this run-up. Yes, I have a crush on Jeff Bezos. Yes, the Kindle is a “success” as far as proving low-priced, smaller tablets can compete with the iPad. Yes, Amazon continues to move beyond e-commerce and into cloud computing and content distribution. But where are the profits?

Until that question can be answered, I’m not investing in Amazon stock. And I caution new money from taking the plunge as well.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a position in AAPL but none of the other stocks named here.

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