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Amazon always reinvests most of their profits into growth, so the PE ratio is somewhat irrelevant, or at best misleading. Edit on downvotes: this is not a cont

by dood 10y ago

Amazon always reinvests most of their profits into growth, so the PE ratio is somewhat irrelevant, or at best misleading. Edit on downvotes: this is not a controversial opinion, see this respected analysis from 2014: http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...

greedo 10y ago
Whenever someone says that an established metric is irrelevant to discussing a publicly traded company, I think they're mistaken.
- snovv_crash 10y ago
  Whenever people optimise for metrics at the expense of what the metric is supposed to be a proxy for, I think they're mistaken.
  - greedo 10y ago
    Agreed. P/E ratio shouldn't be the sole metric used to evaluate a public stock, but it is a useful proxy for evaluating its current price. And when a stock has an outlandishly high P/E ratio, there needs to be an outlandishly compelling story behind the stock. I don't see that with Amazon; I see a company that does the majority of its business in the US, has trouble overseas with some of its offerings, and that has plentiful competition worldwide.
    - snovv_crash 10y ago
      How about if we made an improved metric, which takes Amazon's story into account? Something like static-profit/equity, with static-profit being the profit they would be making if they weren't investing in growth? I suspect this is difficult to get exact numbers for since separating per-item costs vs growth-investment costs won't be separated. But I don't think it would be hard to estimate given a slightly more detailed breakdown of operating expenses.
      - greedo 10y ago
        Sure, if Amazon was forthcoming with any detailed sales breakdowns, but they aren't. Try to find any specific Kindle sales etc. It's always vague "Best sales ever" type comments. My biggest issue with the Amazon crowd is the idea that Amazon is such a special snowflake in terms of operations that investors need to disregard P/E completely, because of the theory that Amazon can just "turn on profits" at will instead of redirecting cash flow to expansion. Retail isn't a new business model, nor is AWS. The only thing that is relatively new is selling over the Internet, and the barriers to entry for that are lower and lower each day; and it's not as if Amazon is lacking competition in each of its business areas. It's similar to the hype around TSLA; that somehow TSLA will be able to achieve an Apple like model where they skim all the profits off of the EV market, and that their competitors are incompetent in comparison to TSLA. I'm a huge fan of Musk, and I hope his multitude of endeavors succeed, but I'd never invest in any of them long term.
  - gordon_freeman 10y ago
    I think PE ratio is something that can not stay high forever. At some point it has gotta catch up with the profits. I can understand that Amazon reinvests most of its profits and can "at-will" switch itself on to generate profits but the problem is that this future switching-on is already been included in their current PE ratio for most part. So the real issue is that it's damn hard to calculate the right price of stock with correct margin-of-sefety.

by dood 10y ago

greedo 10y ago

Whenever someone says that an established metric is irrelevant to discussing a publicly traded company, I think they're mistaken.

snovv_crash 10y ago
Whenever people optimise for metrics at the expense of what the metric is supposed to be a proxy for, I think they're mistaken.
- greedo 10y ago
  Agreed. P/E ratio shouldn't be the sole metric used to evaluate a public stock, but it is a useful proxy for evaluating its current price. And when a stock has an outlandishly high P/E ratio, there needs to be an outlandishly compelling story behind the stock. I don't see that with Amazon; I see a company that does the majority of its business in the US, has trouble overseas with some of its offerings, and that has plentiful competition worldwide.
  - snovv_crash 10y ago
    How about if we made an improved metric, which takes Amazon's story into account? Something like static-profit/equity, with static-profit being the profit they would be making if they weren't investing in growth? I suspect this is difficult to get exact numbers for since separating per-item costs vs growth-investment costs won't be separated. But I don't think it would be hard to estimate given a slightly more detailed breakdown of operating expenses.
    - greedo 10y ago
      Sure, if Amazon was forthcoming with any detailed sales breakdowns, but they aren't. Try to find any specific Kindle sales etc. It's always vague "Best sales ever" type comments. My biggest issue with the Amazon crowd is the idea that Amazon is such a special snowflake in terms of operations that investors need to disregard P/E completely, because of the theory that Amazon can just "turn on profits" at will instead of redirecting cash flow to expansion. Retail isn't a new business model, nor is AWS. The only thing that is relatively new is selling over the Internet, and the barriers to entry for that are lower and lower each day; and it's not as if Amazon is lacking competition in each of its business areas. It's similar to the hype around TSLA; that somehow TSLA will be able to achieve an Apple like model where they skim all the profits off of the EV market, and that their competitors are incompetent in comparison to TSLA. I'm a huge fan of Musk, and I hope his multitude of endeavors succeed, but I'd never invest in any of them long term.
- gordon_freeman 10y ago
  I think PE ratio is something that can not stay high forever. At some point it has gotta catch up with the profits. I can understand that Amazon reinvests most of its profits and can "at-will" switch itself on to generate profits but the problem is that this future switching-on is already been included in their current PE ratio for most part. So the real issue is that it's damn hard to calculate the right price of stock with correct margin-of-sefety.