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AMZN is currently trading at 79 times earnings. It's ridiculous to make an investment without considering whether the market has already priced in the growth (i

AMZN is currently trading at 79 times earnings. It's ridiculous to make an investment without considering whether the market has already priced in the growth (in this case a quadrupling or quintupling of profit is already priced into the stock, assuming 15-20 as a standard P/E range, which might be too high for the current conditions). I bought AMZN at $35 and sold at various points on its rise this year. I think it's currently overvalued, not like Salesforce (CRM) at 125 times earnings which is worth a short, but still high. As a shareholder in AMZN, you don't even get dividends. Therefore you are depending on the company not just quadrupling their profits to earn their current valuation, but once they have quadrupled, they must still be on a high growth trajectory in order for the stock to be trading at high multiple to earnings.

smakz 17y ago
P/E is just one indicator of the value of a stock, and one that really doesn't make a whole lot of sense given how accounting works. Personally if I'm going to invest in a company I look at free cash flow and the growth of the free cash flow way more closely then the more arbitrary P/E. Amazon is phenomenal in this regard.
- mattmcknight 17y ago
  For companies that have stable capital expenditures, free cash flow will (over the long term) be roughly equal to earnings. For companies that don't have stable capex, the FCF will be more lumpy, because it doesn't allow for depreciation. In Amazon's particular case, FCF is exaggerated because of their delayed A/P cycle where items are purchased in one quarter which shows up in cash and paid for by Amazon the next quarter. If short term cash is growing while their bills are getting higher, but this is not reflected in FCF, Net Income is a better metric because it avoids this temporal distortion. Of course, if you think the hype is going to continue for a while, there is no reason not to buy into the momentum and make a short term buck, it's just not a good basis for a 10 year buy and hold as recommended by the original post.

smakz 17y ago

P/E is just one indicator of the value of a stock, and one that really doesn't make a whole lot of sense given how accounting works. Personally if I'm going to invest in a company I look at free cash flow and the growth of the free cash flow way more closely then the more arbitrary P/E. Amazon is phenomenal in this regard.

mattmcknight 17y ago
For companies that have stable capital expenditures, free cash flow will (over the long term) be roughly equal to earnings. For companies that don't have stable capex, the FCF will be more lumpy, because it doesn't allow for depreciation. In Amazon's particular case, FCF is exaggerated because of their delayed A/P cycle where items are purchased in one quarter which shows up in cash and paid for by Amazon the next quarter. If short term cash is growing while their bills are getting higher, but this is not reflected in FCF, Net Income is a better metric because it avoids this temporal distortion. Of course, if you think the hype is going to continue for a while, there is no reason not to buy into the momentum and make a short term buck, it's just not a good basis for a 10 year buy and hold as recommended by the original post.