Is Amazon biting off more than it can chew?

Jeff Bezos, Founder & CEO of Amazon.com Inc

Since the early days of selling books online, Jeff Bezos, founder & CEO of Amazon.com Inc. (AMZN), has always guided his company by three common principles: customer obsession rather than competitor focus, passion for invention, and long-term thinking. While these three philosophies have turned his company into a dominant online retail giant and continues to show robust revenue growth, his extreme vision and excessive 'long-term thinking’ over profitability is literally testing the patience of Amazon’s big shareholders.

During last week’s earnings report for second quarter 2014, the Seattle based company posted a pleasant 23% increase in total revenue to $19.34 billion compared with $15.70 billion in second quarter 2013. However, in a rather more common practice, it posted a net loss of $126 million in the second quarter 2014, or $0.27 per diluted share, compared with net loss of $7 million, or $0.02 per diluted share, in quarter two 2013. This was not a surprise as investors have been accustomed to it, and they would rather continue to lend time to Jeff Bezos than pull out prematurely.

What shocked most of the shareholders was the financial guidance Amazon gave for its current quarter. Despite the 15% - 26% improvement in total revenue, the company expects its operating loss to be up to $810 million compared with $25 million loss for the same quarter last year. Following the announcement of its guidance, its stock price plummeted 10%. In addition to its sophisticated online retail platform, the company continues to spend billions on several new projects includingFire TV streaming-box, Fire Phones, Amazon Studios for Netflix-like movie streaming, Amazon Fulfillment Centers across the world, Amazon-Fresh grocery delivery, Kindle Unlimited e-book subscription, Prime Music to offer prime members unlimited & ad-free access to over a million of songs, and the list goes on.

Amazon's portfolio of revenue streams

This is a company of everything trying to achieve all through heavy reinvestment of capital to meet what is on the founder’s mind. At current stock price, Amazon is valued at over 500 times more than what it is actually worth today. This tells us that investors are in it due to their expectation of higher earnings growth in the future. However, to sustain that, sooner than later, the company needs to return some capital and stop feeding the milk back to its endless cows.

I have no doubt that genius Jeff Bezos will eventually figure out the full algorithm of his grand visions – and yes, one day, he will revolutionize the entire retail industry just the way he did with the creation of the online retail platform. However, he might also have to envision a strategy of soothing his shareholders by letting them taste a flavor of profitability here and there. During this time of uncertainty where the market is begging for a correction, I would not put a penny in this retail giant until I see bottom line profitability as well.