NEW YORK ( TheStreet) -- Amazon ( AMZN) investors can be forgiven for believing profits are inconsequential. Year after year Amazon has successfully sold the idea that when they finally do push some of the top line down to the bottom line it's "going to be astronomical."Eighty-four is the number that should burn inside the head of anyone considering picking up this ticking time bomb. Amazon's price-to-earnings multiple is 84. Historically, stocks with a price-to-earnings ratio of over 20 don't perform above average. Currently the S&P 500-tracking SPY ( SPY) has a multiple of about 15.5.
The only reason why the market has put up with this Land of Oz is because investors have convinced themselves the man behind the curtain doesn't matter. At some point, maybe an earnings release or news of a shifting in strategy by a crucial partner will turn the lights on and illuminate the fact that a lot of revenue doesn't have to mean a lot of income.
Efficiency can't carry the day for Amazon because Apple, Barnes & Noble, Yahoo Shopping merchants, Wal-Mart and others will keep it from happening. The transaction costs are only pennies. Zero barrier of entry is why working at McDonalds ( MCD) doesn't pay well and why Amazon will face a hurricane headwind trying to increase margins. Even Netflix might figure out how to sell products online, and they have tens of millions of monthly visitors. Amazon's Web Services is another example of an exceptional product offering by Amazon. But how is Amazon going to profit from it? AWS and Microsoft's ( MSFT) Azure are currently in a pricing battle for market share. There is no way Amazon can have a pricing war with Microsoft and expect to grow margins at the same time. I like to think anything is possible, but unless Microsoft backs down, I believe Amazon's margins will remain under pressure. Plus, we are talking about Web hosting; there are a lot of extremely skilled players in this space. Even with Microsoft out of the picture, the competition is intense. Microsoft, Google, Apple and Wal-Mart offer a much better risk vs. reward compared to Amazon. Every stock faces a risk of crash; however, Amazon is more of a "when" than "if," especially at a multiple of 84. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.