4 ms·

I like Amazon, but with a PE of 90, I can't make myself buy them. At some point in the future, when all their growth is behind them and they become a value inv

by pdx 15y ago

I like Amazon, but with a PE of 90, I can't make myself buy them. At some point in the future, when all their growth is behind them and they become a value investment as opposed to a speculative investment, they need to make me between 5% and 10% on my money if I buy the whole company. That's how I evaluate stocks. That means a PE of 10 to 20. In what year do we believe that Amazon will be making 5X to 9X what it's making now, given it's current maturity? If that year is near, than, sure, perhaps buy here. I just can't imagine that kind of growth for such a large company.

vannevar 15y ago
Current revenue growth is around 50% annually; if that continues, it will reach the lower edge of your target (5X) in 48 months. Assuming of course it can maintain its margins.
- mikeryan 15y ago
  Am I missing something or don't your assumptions assume that over those same 48 months Amazon's price remains static? Note that any assumption of Amazon's margins remain the same is kind of hard pressed. Their revenues this quarter was 40% greater then the same quarter last year - yet their earnings were down 73%.
  - vannevar 15y ago
    The question was 'when will Amazon be making 5X what they make now?', and the answer (at current growth rates and current margins) is 48 months. Which is not a long time, thereby explaining the high P/E. If you think the growth will slow substantially or the margins will shrink substantially (or both) in the next 48 months, then the PE is too high. Otherwise, perhaps it's not so crazy after all.
kkowalczyk 15y ago
Personally I think that Amazon has essentially unlimited growth opportunity, much higher than even the most amazing, most profitable product companies like Apple or Google. Product companies have a Microsoft problem: after they dominate a given market (and Microsoft pretty much dominated a lot of the most valuable segments of software market) and that market matures into slow growth, they have a very hard time finding new opportunities and consequently only grow with the size of the market, and as we've seen with Microsoft's flat stock price, Wall Street doesn't like that. To me, Amazon's is Merchant Of Everything, both physical and digital and Everything is a very big market. Amazon grew to its current size by exploiting shift to on-line purchasing but today they're big enough to start taking advantage of their size. Walmart conquered U.S. with lower prices but Amazon can offer even better prices because they don't have to operate physical stores with staff, just warehouses. Amazon is not done until they have a warehouse for each Walmart store, Best Buy store etc. and their competitive advantage grows with every warehouse they build. And when there are more Amazon's warehouse than Starbucks, there's international market to conquer. Additionally Bezos has shown that he's very comfortable competing aggressively, running the business at the edge of profitability, which makes sense if you think that Amazon's ultimate ambition is to drive every other merchant out of business by offering lower prices and become the Merchant Of Everything.
- hyperbovine 15y ago
  Amazon has got to be more sensitive to the vicissitudes of the global economy though. I could never stop using Google or Apple products in my day-to-day. Whereas my entire life is pretty much an uphill battle to buy less shit off Amazon. If push came to shove, the MP3/book/DVD/gadget/clothing purchases would be the first to go. Also if it suddenly got a lot more expensive to ship physical goods, Amazon's core business would take a beating.
  - wnight 15y ago
    Those goods would still have to be shipped to a traditional store, where traditional staff drove in and stood around and dusted it, so you could drive (or whatever) in and get it. As opposed to drop-shipping the most economical one on demand, and not wasting all the time and shipping stocking places, hoping you'll come in and buy from them before the junk is obsolete. Stores, except tailors and the like, are dead. As for their warehouses, cities expand and real-estate, especially when at rock-bottom, is a pretty safe bet compared to renting.
gujk 15y ago
What would you do with that 5%? Would you reinvest it if you don't have any consumption needs now? Amazon is reinvesting their earnings. P/E isn't a good metric for a growth stock.

by pdx 15y ago

vannevar 15y ago

Current revenue growth is around 50% annually; if that continues, it will reach the lower edge of your target (5X) in 48 months. Assuming of course it can maintain its margins.

mikeryan 15y ago
Am I missing something or don't your assumptions assume that over those same 48 months Amazon's price remains static? Note that any assumption of Amazon's margins remain the same is kind of hard pressed. Their revenues this quarter was 40% greater then the same quarter last year - yet their earnings were down 73%.
- vannevar 15y ago
  The question was 'when will Amazon be making 5X what they make now?', and the answer (at current growth rates and current margins) is 48 months. Which is not a long time, thereby explaining the high P/E. If you think the growth will slow substantially or the margins will shrink substantially (or both) in the next 48 months, then the PE is too high. Otherwise, perhaps it's not so crazy after all.

kkowalczyk 15y ago

Personally I think that Amazon has essentially unlimited growth opportunity, much higher than even the most amazing, most profitable product companies like Apple or Google. Product companies have a Microsoft problem: after they dominate a given market (and Microsoft pretty much dominated a lot of the most valuable segments of software market) and that market matures into slow growth, they have a very hard time finding new opportunities and consequently only grow with the size of the market, and as we've seen with Microsoft's flat stock price, Wall Street doesn't like that. To me, Amazon's is Merchant Of Everything, both physical and digital and Everything is a very big market. Amazon grew to its current size by exploiting shift to on-line purchasing but today they're big enough to start taking advantage of their size. Walmart conquered U.S. with lower prices but Amazon can offer even better prices because they don't have to operate physical stores with staff, just warehouses. Amazon is not done until they have a warehouse for each Walmart store, Best Buy store etc. and their competitive advantage grows with every warehouse they build. And when there are more Amazon's warehouse than Starbucks, there's international market to conquer. Additionally Bezos has shown that he's very comfortable competing aggressively, running the business at the edge of profitability, which makes sense if you think that Amazon's ultimate ambition is to drive every other merchant out of business by offering lower prices and become the Merchant Of Everything.

hyperbovine 15y ago
Amazon has got to be more sensitive to the vicissitudes of the global economy though. I could never stop using Google or Apple products in my day-to-day. Whereas my entire life is pretty much an uphill battle to buy less shit off Amazon. If push came to shove, the MP3/book/DVD/gadget/clothing purchases would be the first to go. Also if it suddenly got a lot more expensive to ship physical goods, Amazon's core business would take a beating.
- wnight 15y ago
  Those goods would still have to be shipped to a traditional store, where traditional staff drove in and stood around and dusted it, so you could drive (or whatever) in and get it. As opposed to drop-shipping the most economical one on demand, and not wasting all the time and shipping stocking places, hoping you'll come in and buy from them before the junk is obsolete. Stores, except tailors and the like, are dead. As for their warehouses, cities expand and real-estate, especially when at rock-bottom, is a pretty safe bet compared to renting.

gujk 15y ago

What would you do with that 5%? Would you reinvest it if you don't have any consumption needs now? Amazon is reinvesting their earnings. P/E isn't a good metric for a growth stock.