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. 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. 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.
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. Follow @RobertWeinstein 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.