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In a way Amazon is an absurd object lesson - their P/E ratio isn't far from double Facebook's and Facebook was five times as profitable as Amazon last quarter.

In a way Amazon is an absurd object lesson - their P/E ratio isn't far from double Facebook's and Facebook was five times as profitable as Amazon last quarter. If anything, Amazon shows that as long as you're profitable and retain a controlling stake in the company, the media's and Wall Street's much-vaunted expectations aren't worth a damn.

InclinedPlane 14y ago
P/E isn't everything since earnings can fluctuate for a lot of reasons. Amazon's market cap is only about twice their annual revenue, compared to 28x for facebook.
- ScottBurson 14y ago
  But I think you have to admit that there's an expectation built into Amazon's market cap that they will eventually find a way to improve their margins. Compare HP, whose market cap is around 1/3 annual revenue at the moment.
  - InclinedPlane 14y ago
    Not necessarily. AWS and Kindle/eBooks are already proven businesses with high margins, if the current growth rate on those businesses is maintained then the overall profit margin across all Amazon will improve. And in both cases Amazon is the leader in those fields (PaaS and eBooks). Also, Amazon has been spending a lot of money lately on expansion and hiring, once that's stabilized their profit will go up as well. Overall I'd say the bet that AWS, Kindle, and Amazon's retailing business will sustain double digit growth rates over the next several years is a pretty safe bet. Also you need to factor in that Amazon has about $25 billion in assets, so their net market cap is only about $75 billion. Anyone looking at Amazon's revenue growth and the diversified foundations of that company can't be too upset at the seemingly high P/E ratio of AMZN. Facebook is also growing revenue like crazy, but their market is much different and there are a lot of open questions on whether or not they can maintain that growth (or even retain their user base). That doesn't mean that facebook is a bad investment, it just means that there's a lot of risk there and the stock price doesn't seem to reflect any of that risk. Consider: Yahoo has nearly as many users as Facebook (700 mil vs 900 mil), higher total revenue, just as many experienced developers, and a similar business model (ads). Almost all of facebook's valuation lies at the feet of their reputation, not at any sound business fundamentals, and that's a pretty big burden.

InclinedPlane 14y ago

P/E isn't everything since earnings can fluctuate for a lot of reasons. Amazon's market cap is only about twice their annual revenue, compared to 28x for facebook.

ScottBurson 14y ago
But I think you have to admit that there's an expectation built into Amazon's market cap that they will eventually find a way to improve their margins. Compare HP, whose market cap is around 1/3 annual revenue at the moment.
- InclinedPlane 14y ago
  Not necessarily. AWS and Kindle/eBooks are already proven businesses with high margins, if the current growth rate on those businesses is maintained then the overall profit margin across all Amazon will improve. And in both cases Amazon is the leader in those fields (PaaS and eBooks). Also, Amazon has been spending a lot of money lately on expansion and hiring, once that's stabilized their profit will go up as well. Overall I'd say the bet that AWS, Kindle, and Amazon's retailing business will sustain double digit growth rates over the next several years is a pretty safe bet. Also you need to factor in that Amazon has about $25 billion in assets, so their net market cap is only about $75 billion. Anyone looking at Amazon's revenue growth and the diversified foundations of that company can't be too upset at the seemingly high P/E ratio of AMZN. Facebook is also growing revenue like crazy, but their market is much different and there are a lot of open questions on whether or not they can maintain that growth (or even retain their user base). That doesn't mean that facebook is a bad investment, it just means that there's a lot of risk there and the stock price doesn't seem to reflect any of that risk. Consider: Yahoo has nearly as many users as Facebook (700 mil vs 900 mil), higher total revenue, just as many experienced developers, and a similar business model (ads). Almost all of facebook's valuation lies at the feet of their reputation, not at any sound business fundamentals, and that's a pretty big burden.