✓ Watching AMZN
on My Watchlist
Once simply an online purveyor of books, Amazon.com has become a marketplace for just about anything you’d want to buy.
All great companies soon compress their P.E. ratios. WMT, CSCO, MSFT, AAPL. The list goes on and on. Amazon will continue to be a great company, but the price will be stagnant while earnings increase.
Considering their almost nonstop 30% per year growth, how are you certain that a compression of their P/E ratio will actually result in the stock underperforming the market average? Say that one year from now, most of their stats have stayed the same, except they've decided to shave their capital expenditures such that they started making 10% growth per year instead of 30% and a net profit margin of 18% plus a 2% dividend instead of roughly 0%, what do you think their P/E will be then, and how do you think that will affect demand for the stock? I'd guess that it would suddenly have a P/E of 7, and dummies who make all their decisions based on P/E ratio would suddenly start pouring in, perhaps doubling the price. This is why I look at P/S, 5 year average growth, and gross margins, and pay almost no attention to P/E.
If it is allowed to just miss the fact that lower capex doesnt equal higher profits(because its only relevant for cashflow) and on that basis make up unrealistic numbers like that juicy 18% net income margin we can justify paying any price for any company at any point in time.
RedScourge - Where on earth are you getting that 18% net profit margin? Wal-mart and Target currently have net profits of 3.7%. Amazon is in the same business, which is retailing. Even at it's most profitable time, I don't think they cracked 4%. Let's not forget the effect of taxes. When you don't make any money, you don't have to worry about them. But in order to make 18% net profit, you need make 25% profit before taxes. (Simplification, I used 28% to average US & foreign.) It's impossible to get these kinds of margins by selling general merchandise in the highly competitive retail sector.The bulls say AMZN's lack of profitability comes from "Investing for growth". Because Bezos said so. Looking at their financial statements, I'm not so sure. In 2012, Amazon lost $2.8 billion in shipping costs. That's the difference between what they collected as shipping revenue and what they spent. That's 4.7% of revenue. Same 4.7% so far in 2013. Sounds like we found the missing profits! Does free shipping count as "Investing for growth"? It certainly helps build sales, but in my opinion it's not investing.
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