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Can Amazon Keep Defying Gravity?

I think it is time for investors to view the growing pessimism as a sign the company's investments might take a bit longer to produce the bottom-line growth for which investors are hoping.

Likewise, it's never a welcome sign that stocks are able to grow in the face of decreasing estimates. In fact, the opposite tends to occur. So essentially, investors still placing bets on Amazon today are assuming the company can continue to defy both gravity and logic at the same time. The odds are not in its favor.

Bottom Line

In Wall Street's insatiable appetite for growth, it is not uncommon for stories such as Amazon to disrupt conventional valuation metrics. That's all well and good as long as the growth supports its premium pricing. But in Amazon's case, revenue growth seems to be the only catalyst that matters. That just seems too dangerous absent some important considerations.

Can it sustain its growth in pretax profits as well as improve its gross margins in areas where it has made significant capital investments to compete with Apple, Google and Wal-Mart and now Microsoft (MSFT)? Amazon's valuation assumes that at some point its bottom line will reward investors handsomely. But that may not be for another 16 to 24 months.

The length of time the company is able to defy gravity is one thing, but investors have to start wondering how long they should leave their chips on the table before the house does what it always does.

At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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