Must-See Amazon Charts: Downside Risks Outweigh Potential Gains

NEW YORK (TheStreet) -- Investors compare the risks and rewards of any given investment with relatively basic performance metrics for a good reason. They work. Growth rate, revenue and earnings multiples, gross and net margins, market share, dividend yield and payout, and short interest are examined closely to measure risk and reward.

Over time, on average, the basics work effectively to help shape a winning portfolio. I've heard and read many reasons why traditional valuation metrics no longer apply for certain high flyers over the years, but as a student of the markets for over 20 years, I've yet to find one that holds water.

The problem investors face is "over time" is usually much longer than most investors consider. It's the time beyond what investors consider a short-trend that gets some into trouble, even though in retrospect it shouldn't. Companies become overvalued when they become "loved" by the mob. The reasons for love are different for any given high-flyer, but the resulting emotional sentiment never changes. When investors become overly optimistic they extrapolate the existing trend into the future in total disregard of the evidence that refutes the likeliness or sometimes even the possibility.

Amazon (AMZN) is one such company, in my opinion. TheStreet's Rocco Pendola recently chided me for my bearish Amazon opinion. After losing a six-month long wager that Amazon would trade at $200 per share before $300, we agreed to make it double or nothing at $400 and $200, a bet that I all but conceded to him just a few days ago. However, as I said to Pendola, I may lose a beer or two, but they will be purchased with gains from shorting if it moves above $400.

Of course, I don't know shorting above $400 a share will result in a profit. I don't need to because I work with odds, not prophecy. Since a picture is worth a thousand words, or so say, here are my primary reasons why I believe the downside risk isn't worth the potential gain.

AMZN Revenue (Quarterly) Chart

This chart appears to support the bullish thesis. It's traversing from the bottom left to the top right, but companies don't put revenue in the bank (not for long anyway). It's the profits that matter.

AMZN Market Cap Chart

Even if Amazon hasn't delivered much in relative shareholder value, that hasn't stopped analysts from believing rewards are just around the next quarter. Well, maybe not much in rewards, unless you consider a 100+ P/E ratio after exceeding $92 billion in revenue a reward.

AMZN EPS Estimates for Current and Next 3 Fiscal Years Chart

Increases don't appear to be coming from Wal-Mart (WMT) or Target (TGT), though both of these retailing giants are growing revenue also. Target not long ago acknowledged that online revenue accounts for less than 2% of total sales. Following in Best Buy's (BBY) footsteps, Target announced price matches of Amazon and Wal-Mart.

Big box retailers are also adapting to the realities of online sales. Target is spending more to develop and increase its online sales channel than retail. For Amazon, the most likely result is a slowdown in revenue growth. The same revenue growth that encouraged investors to bid the stock to a mind-numbing 1300 trailing, 178 current, and 150 forward P/E ratio. In other words, bullish investors are wagering that Amazon is a terrific value to buy even if analysts expect the $176 billion company to reproduce 150 years of 2014's estimated profits annually to break even.

AMZN PE Ratio (Annual) Chart

Historically, investors who become caught up in the excitement of a company and pay a premium for shares after a momentous appreciation wish they didn't. I hope you don't find yourself in a similar situation.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

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

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