This is the Biggest Risk to Amazon Stock

The Nasdaq index surged ahead this week and hit a record high. At the time of writing this post it has gained 100 points on the day to be at 7,530 points. The Dow Jones has also climbed thanks to stronger than expected job numbers in February. Today is the first time since January 26th, that either index has reached a record high. Large tech companies such as Facebook, Netflix, Alphabet, and Amazon all gained to aid the rise of the indexes. Amazon stock (AMZN) has increased so much recently that it’s hard to imagine the company was only worth $32 billion a decade ago. Of course today Amazon has a market capitalization of $760 billion, almost as big as Alphabet – Google’s parent company. Amazon may be a huge company. But if it wants to continue succeeding it has to keep an eye on its biggest risk, which is its labor relations.

Over the last 5 years Amazon has been on a hiring spree. In 2013 it employed 100,000 workers. In 2014 it grew to 150,000. And then 200,000 in 2015. 300,000 in 2016. And by the end of 2017 it reached half a million people, that’s more than the population of Atlanta, Georgia. The company plans to add another 100,000 jobs in North America this year. Amazon is certainly doing a lot of things right. It holds nearly a monopoly when it comes to online retailing. Its Prime related services are drawing more customers into its ecosystem and platforms. The cloud computing arm of the company is still growing at a rapid pace. And Amazon recently announced it wants to open checking accounts for its members, like a bank. According to consulting firm Bain & Co, Amazon “could wind up with more than 70 million banking customers over the next five years if it started to offer checking and other financial products.”

The future certainly looks very bright for the online giant. One of the biggest criticisms for some investors is the valuation of the stock. It’s worth thinking about the risks before someone goes long in Amazon shares today. It’s basically trading at 300 times earnings at the moment. It wouldn’t be a fair assessment to value a company based on a single metric, but as a measure of profitability having a fair P/E ratio is fairly important. The company has done an impressive job growing. But like any empire the world has seen, growth must be managed properly or it will fall.

The biggest risk facing Amazon today is that it may not deliver on long term profitability. More specifically regulations, excess hiring, and labor disputes could increase the company’s costs to the point where investors won’t see a return on their money for decades. Amazon doesn’t have to worry too much about competitors. It’s main business is very streamlined and proprietary. It keeps its secrets very well secured. But as Amazon hires more people, there will inevitably be more complications and complaints. Many employees have already spoken out against the company’s tough culture. 10 hour shifts are the norm, compensation is lower than industry standard for most warehouse associates. This had lead workers to file class action lawsuits against Amazon. If the company wants to continue growing it needs to find a way to keep its employees content with their jobs. Costco decided to increase its starting wage for all its entry level employees some time ago. It could reach the point where Amazon may be forced to do the same eventually.

This author has 10 shares of AMZN shares as of writing this post.

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