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Do Wall Street And Investors Love Amazon A Little Too Much?

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Do Wall Street And Investors Love Amazon A Little Too Much?

What's not to love about Amazon.com, Inc. (NASDAQ: AMZN)? =Consumers love its speedy delivery of millions of items. Investors love its growth profile and prospects of hitting a $1-trillion valuation.

But what if investors are wrong in loving Amazon? This is a view that Gadfly's Shira Ovide explored.

Unfettered Adoration, Critiqued

According to Ovide, there most certainly is a lot for investors to love in Amazon's business, including a revenue growth of 23 percent in the recent quarter and a "surprisingly healthy" (by Amazon's standards) operating profit margin of 2.8 percent.

But on the other hand, Amazon guided its operating profit for the second quarter below what the Street was expecting. This was merely greeted with a shrug by investors, but this isn't right.

Ovide noted this implies "Amazon keeps acting like Amazon" by taking 97 cents of every dollar it sees in sales by reinvesting it back in what appears to be a never-ending cycle of investments in both legacy and new ventures. However, for the time being at least, the company "deserves the benefit of the doubt to spend how it wishes" — its paths toward growth are plentiful.

So, how is it that the Street expects Amazon's 2017 profit to hit $6 billion this year and $10 billion next? After all, the company has never shown investors an annual operating profit better than $4.2 billion.

In fact, even if Amazon hits the high end of its operating income guidance for the second quarter, its cumulative operating income for the first half of 2017 will be just $2.1 billion.

"It's not Amazon's fault that Wall Street expects a profit bonanza, but the expectations seem out of hand," Ovide wrote.

Bottom line, investors may be right in loving Amazon's "rebel" status as it is everywhere and does everything. But are they right in loving a stock that may be out of touch with the Street?

Related Links:

Amazon's Q1 Results May Be Indicating A Return To Momentum

Gadfly's Ovide: Intel Is Spending Money 'Like It's 1999'

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