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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.
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