NEW YORK (TheStreet) -- For Amazon (AMZN) - Get Report investors, the run higher has been nothing short of a storybook romance.

So far, Amazon shares have encountered only small bumps on the way. It's easy to see why so many investors have fallen under the spell that valuations don't apply with Amazon. Even after

Apple

(AAPL) - Get Report

and

Barnes & Noble

(BKS) - Get Report

created real competition for Amazon's Kindle, shares in Amazon continued climbing.

Microsoft

(MSFT) - Get Report

and

Google

(GOOG) - Get Report

are offering cloud services with prices falling so fast it could make the smiley face at

Wal-Mart

(WMT) - Get Report

blush with envy. The writing has been on the wall for some time that cloud services may become a significant cash flow burden for Amazon.

The writing has also been on

TheStreet

, because I have repeatedly warned investors about the perils Amazon faces, including this article

It's Spring on Wall Street, But Winter May Be Near for Amazon

How can anyone believe Amazon's cloud services will be anything other than a race to the bottom of profitability when Microsoft and Google are stepping up aggressiveness and lowering prices to take away market share from Amazon?

Rackspace Hosting's

(RAX)

stock chart isn't trending from the top left to the bottom right because investors believe margins and profitability are expanding as the space expands.

Also see: TiVo Roots for Tebow After Jets Release Him >>

Clearly, Rackspace is more vulnerable to competition in cloud computing compared with Amazon; however, reduced vulnerability isn't tantamount to invincibility, even if Amazon has been treated like royalty in the past.

Investors should pay close attention to revenue, income and margins. If Apple's investors are justified in their disquiet for margins, Amazon's investors should be in full blown consternation.

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AMZN Gross Profit Quarterly

data by

YCharts

Amazon's permabulls maintain that the company is building the infrastructure needed to increase profitability. That may be true; I buy into the argument right up to the point of profitability, at least on a per share basis. Sure overall profits may increase slightly, but will that actually be enough to make Amazon a good investment? I think not.

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AMZN Total Expenses Quarterly

data by

YCharts

Amazon continues to allocate greater and greater amounts of money for relatively small gains in profit. It's not an altogether failing strategy, after all it has effectively kept investors optimistic to the point of driving up the forward P/E ratio to triple digits. At some point, the scale of operations becomes so gigantic that a meaningful increase in revenue is no longer a viable option.

It's simply not as easy for Amazon to double revenue again at the current scale as it was when Amazon's revenue was half the magnitude it is presently. Amazon's real hope for a fairy-tale ending depends on expanding margins and profitability. Unfortunately, the magic Amazon needs is hard to find outside of children's books.

Amazon sells more digital books than physical books. This should concern investors to no end. Because Amazon doesn't own content and is only a reseller, what will prevent margin-compression in digital sales distribution? Publishers including

Wiley Finance

already have the ability to distribute content to consumers directly. At a minimum, Amazon has little pricing power, and the risk of falling market share and margins is more likely a matter of when, not if.

Also see: 13 Myths About Tech >>

Amazon faces competition in digital content delivery from every possible direction. The company's world-class distribution warehouse network may enjoy economies of scale and efficiency over other online retailers, but in the world of digital downloads, other competitors enjoy superior demographics in, for example, niche book sales with little barrier to entry. In short, you can forget about margin and profit growth in Amazon's large digital-product revenue stream.

Don't be the last one to figure this out, or you may pay a steep price for your education.

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

At the time of publication, the author had no positions in stocks mentioned

.