Investors in Amazon.com, Inc. (NASDAQ:AMZN) have done amazingly well since the company’s initial public offering (IPO). The market capitalization of the e-commerce giant has exploded to more than $450 billion, with shares recently breaching the $1,000 mark, giving founder and largest shareholder Jeff Bezos a realistic shot at becoming the richest man in the world.
The disruption of so many key industries by new technologies is what has consistently driven the share price of Amazon higher over the years. The most recent move by the company follows a long-standing effort to enter into the food delivery business, in which the company has decided to purchase a high-quality national food retailer Whole Foods Market (NASDAQ:WFM) in a $14-billion U.S. deal.
On this news, shares of Amazon exploded, and have since come back down to earth as investors begin to weigh the significance of the deal alongside the realities of the food distribution business (highly competitive, low margins, traditional hub and spoke model) as factors which may make this exercise less profitable and exciting than some analysts believe as of right now.
Amazon has remained an overvalued stock nearly since its inception, with outsized growth expectations fueling investors to buy into the stock at a premium with the expectation that Amazon will be able to grow faster, or the premium investors demand will increase over time. Given the current valuation of Amazon compared to many other large technology companies, it appears to me that significant downside remains should the company falter in any meaningful way from investor expectations. In that regard, I would remain very cautious with this stock.
Invest wisely, my friends.
