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P/E is not a meaningful metric. The 10x rule of thumb doesn’t work for all companies. For one, not all companies have the same level of infrastructure—Amazon ha

P/E is not a meaningful metric. The 10x rule of thumb doesn’t work for all companies. For one, not all companies have the same level of infrastructure—Amazon has a lot of warehouse and distribution infrastructure, not to mention all those AWS servers they own, etc. you should properly subtract that out before doing the calculation. Even still Amazon has a crazy high valuation, just not insanely high. Not sure I’d bet against it though.

hidenotslide 9y ago
P/E is a very meaningful metric. It's not that Amazon has infrastructure that matters, it's that they are reinvesting their earnings at a higher rate than other companies. If they returned capital to investors because they didn't have enough potential projects, then the investors would need to decide how to reinvest it. Your comment about reflecting the infrastructure in valuation would lean toward looking at Price/Book Value instead. Amazon would look quite expensive on this measure as well.
- garmaine 9y ago
  My “not meaningful” point should perhaps been “can’t conclusively draw data from it alone” or “don’t make investment decisions based on this metric only” and I’d stand by that.
  - prklmn 9y ago
    P/E is without a doubt meaningful, and looking at it in the context of growth i.e. PEG, makes it even more meaningful. Amazon is selling at an objectively absurd PEG ratio of 5. Anything over 2 is fundamentally considered overvalued by people who use this metric. However, You could argue that none of the fundamentals are meaningful because we are in a bubble, with Amazon on the forefront.
- __blockcipher__ 9y ago
  I generally prefer free cash flow yield (fcf / dollar invested), although both PE and FCF can be fucked with depending on how certain expenses are classified. That being said, if I had to choose one of the two, I would go with FCF yield every time.
  - prklmn 9y ago
    It's also very common now for companies to buy back a ton of stock thus lowering the share denominator in the earnings portion of the ratio, while not actually growing revenue much if at all.
    - hidenotslide 9y ago
      You are referring to Earnings/Share, not Price/Earnings. It doesn't matter much anyway, if they can make the same amount of money with less invested capital that should increase their metrics. And there are good tax reasons to prefer share buybacks over dividends as a way to return cash to shareholders.
      - prklmn 9y ago
        I was referring to both because EPS is wrapped up into P/E... P/E = stock price / (earnings / # of shares oustanding) And it actually does matter because a company can steadily grow EPS while not growing revenue meaning that something might be amiss, but it can easily be overlooked because EPS has been growing. Also, there are plenty of reasons not to want buybacks. Many times companies will buy their stock when it's at highs, thus destroying value for shareholders.
  - hidenotslide 9y ago
    I agree, I should have mentioned free cash flow. Of course the real answer is to look at many metrics and get a broad picture. But I doubt you are going to find a "value investing" reason to buy AMZN at these levels, it's clearly a growth stock.
- matt4077 9y ago
  Increases in "book value" are reflected in earnings. Example: you make a profit of $100. You use those $100 to buy the Brooklyn Bridge. Your profit is still $100. It's only your cash flow that's now at $0.
  - hidenotslide 9y ago
    The difference is stocks vs. flows. $100 capex only shows up in year one, but the balance sheet goes up permanently (depreciating of course). When the parent mentions "level of infrastructure" it refers to the balance sheet account, which is why I mentioned P/B.
alexasmyths 9y ago
It would take way more than 300 years of profits at the current level to justify the stock price. That's crazy high. Even if AMZN could 10x their earnings overnight by stopping expansion or something, they'd still have a 30x - meaning way more than 30 years of future profits at this level. Either that, or they'd still have to grow that much. Stocks are in a clear bubble. Snap, AMZN, Tesla, and also BTC are stupid, and the world economy needs a correction just to remind people to do their homework. And it's pretty rational to ask if there is much upside to Amazon - because there's a whole lot of downside risk now as well if financial markets decide that 300 is a 'dumb' multiple.
- y_u_no_rust 9y ago
  > Snap, AMZN, Tesla, and also BTC Of those four I can only see AMZN and likely Tesla lasting the next 10-20
- adventured 9y ago
  Amazon won't have a hard time eventually generating $20+ billion in net income (assuming very low net income margins of 5%). AWS by itself will hit $10 billion in operating income in three to four years. That business accounts for at least half of Amazon's present market cap. If AWS were a stand-alone publicly traded company, it'd have at least a $250 billion market cap right now. The market is clearly anticipating Amazon is going to get a lot larger yet. They're still growing at ~25% annually (minus Wholefoods), despite approaching $200 billion in sales. There's also no question that it's extremely richly valued here no matter what their growth is over the next five or so years.
  - alexasmyths 9y ago
    They'll grow for a while yet but I don't see how they'll keep doing that, moreover, I don't see how they'll ever get to the margins they need. Cloud services are also a competitive business and margins I think will erode eventually.
    - adventured 9y ago

hidenotslide 9y ago

P/E is a very meaningful metric. It's not that Amazon has infrastructure that matters, it's that they are reinvesting their earnings at a higher rate than other companies. If they returned capital to investors because they didn't have enough potential projects, then the investors would need to decide how to reinvest it. Your comment about reflecting the infrastructure in valuation would lean toward looking at Price/Book Value instead. Amazon would look quite expensive on this measure as well.

garmaine 9y ago
My “not meaningful” point should perhaps been “can’t conclusively draw data from it alone” or “don’t make investment decisions based on this metric only” and I’d stand by that.
- prklmn 9y ago
  P/E is without a doubt meaningful, and looking at it in the context of growth i.e. PEG, makes it even more meaningful. Amazon is selling at an objectively absurd PEG ratio of 5. Anything over 2 is fundamentally considered overvalued by people who use this metric. However, You could argue that none of the fundamentals are meaningful because we are in a bubble, with Amazon on the forefront.
__blockcipher__ 9y ago
I generally prefer free cash flow yield (fcf / dollar invested), although both PE and FCF can be fucked with depending on how certain expenses are classified. That being said, if I had to choose one of the two, I would go with FCF yield every time.
- prklmn 9y ago
  It's also very common now for companies to buy back a ton of stock thus lowering the share denominator in the earnings portion of the ratio, while not actually growing revenue much if at all.
  - hidenotslide 9y ago
    You are referring to Earnings/Share, not Price/Earnings. It doesn't matter much anyway, if they can make the same amount of money with less invested capital that should increase their metrics. And there are good tax reasons to prefer share buybacks over dividends as a way to return cash to shareholders.
    - prklmn 9y ago
      I was referring to both because EPS is wrapped up into P/E... P/E = stock price / (earnings / # of shares oustanding) And it actually does matter because a company can steadily grow EPS while not growing revenue meaning that something might be amiss, but it can easily be overlooked because EPS has been growing. Also, there are plenty of reasons not to want buybacks. Many times companies will buy their stock when it's at highs, thus destroying value for shareholders.
- hidenotslide 9y ago
  I agree, I should have mentioned free cash flow. Of course the real answer is to look at many metrics and get a broad picture. But I doubt you are going to find a "value investing" reason to buy AMZN at these levels, it's clearly a growth stock.
matt4077 9y ago
Increases in "book value" are reflected in earnings. Example: you make a profit of $100. You use those $100 to buy the Brooklyn Bridge. Your profit is still $100. It's only your cash flow that's now at $0.
- hidenotslide 9y ago
  The difference is stocks vs. flows. $100 capex only shows up in year one, but the balance sheet goes up permanently (depreciating of course). When the parent mentions "level of infrastructure" it refers to the balance sheet account, which is why I mentioned P/B.

alexasmyths 9y ago

It would take way more than 300 years of profits at the current level to justify the stock price. That's crazy high. Even if AMZN could 10x their earnings overnight by stopping expansion or something, they'd still have a 30x - meaning way more than 30 years of future profits at this level. Either that, or they'd still have to grow that much. Stocks are in a clear bubble. Snap, AMZN, Tesla, and also BTC are stupid, and the world economy needs a correction just to remind people to do their homework. And it's pretty rational to ask if there is much upside to Amazon - because there's a whole lot of downside risk now as well if financial markets decide that 300 is a 'dumb' multiple.

y_u_no_rust 9y ago
> Snap, AMZN, Tesla, and also BTC Of those four I can only see AMZN and likely Tesla lasting the next 10-20
adventured 9y ago
Amazon won't have a hard time eventually generating $20+ billion in net income (assuming very low net income margins of 5%). AWS by itself will hit $10 billion in operating income in three to four years. That business accounts for at least half of Amazon's present market cap. If AWS were a stand-alone publicly traded company, it'd have at least a $250 billion market cap right now. The market is clearly anticipating Amazon is going to get a lot larger yet. They're still growing at ~25% annually (minus Wholefoods), despite approaching $200 billion in sales. There's also no question that it's extremely richly valued here no matter what their growth is over the next five or so years.
- alexasmyths 9y ago
  They'll grow for a while yet but I don't see how they'll keep doing that, moreover, I don't see how they'll ever get to the margins they need. Cloud services are also a competitive business and margins I think will erode eventually.
  - adventured 9y ago