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Amazon's retail business probably has a pretty low margin, and I'm not sure it can make it up in volume. Maybe AWS + Kindle make up for it, but I have my doubt

Amazon's retail business probably has a pretty low margin, and I'm not sure it can make it up in volume. Maybe AWS + Kindle make up for it, but I have my doubts. If you believe in efficient markets (which I, personally, think is bunk), then AMZN's 777B market cap to APPL's 926B means the Market doesn't think so, either. Apple has both large volume and high margins, which is a killer combination. On the other hand, I doubt Apple is going to grow much, whereas Amazon probably has some growth left.

_emacsomancer_ 8y ago
Also, a lot of profitability is in Apple's high margins. If that ceases to be a sustainable model....
- mrep 8y ago
  Which is why Apples P/E is so low compared to compared to other tech stocks which I think is totally reasonable. I just got a Pixel 2 and like it more than my old Iphone 6S. With Apples profits so heavily tied to continual sales of 1 main hardware product line, their profit can tank in just a few years and thus I consider very risky.
adventured 8y ago
The math on their business is pretty straightforward. Extrapolate Amazon's retail business out to the size of Walmart, $500 billion. Assume extreme retail margins: 5% net income margins. $25 billion in profit, at max size, under the best case scenario Amazon will ever see. More likely, Amazon will never reach the retail size of Walmart today (inflation adjusted). A more likely number: maybe $12 to $15 billion in retail profit. Slap an optimistic valuation for the retail sector onto that: $240 to $300 billion valuation. Comparable to Walmart. Next, AWS at $60 to $80 billion in eventual sales, with 20%-25% margins, spitting off perhaps $15b-$20b in operating income. That business might end up worth $300b to $500b. All of Amazon's best case scenario growth for the next ten years, is already priced into the stock. That's what you would typically expect with a ~250 PE though.

_emacsomancer_ 8y ago

Also, a lot of profitability is in Apple's high margins. If that ceases to be a sustainable model....

mrep 8y ago
Which is why Apples P/E is so low compared to compared to other tech stocks which I think is totally reasonable. I just got a Pixel 2 and like it more than my old Iphone 6S. With Apples profits so heavily tied to continual sales of 1 main hardware product line, their profit can tank in just a few years and thus I consider very risky.

adventured 8y ago

The math on their business is pretty straightforward. Extrapolate Amazon's retail business out to the size of Walmart, $500 billion. Assume extreme retail margins: 5% net income margins. $25 billion in profit, at max size, under the best case scenario Amazon will ever see. More likely, Amazon will never reach the retail size of Walmart today (inflation adjusted). A more likely number: maybe $12 to $15 billion in retail profit. Slap an optimistic valuation for the retail sector onto that: $240 to $300 billion valuation. Comparable to Walmart. Next, AWS at $60 to $80 billion in eventual sales, with 20%-25% margins, spitting off perhaps $15b-$20b in operating income. That business might end up worth $300b to $500b. All of Amazon's best case scenario growth for the next ten years, is already priced into the stock. That's what you would typically expect with a ~250 PE though.