Valuation is everything — except when it’s not.
Witness Amazon (NASDAQ:AMZN), which is hitting new all-time highs on a slew of additions to its Kindle Fire line of e-readers and tablets. A very expensive stock just went stratospheric, at least when looking at quaint old metrics like price-to-earnings (P/E) multiples.
As I’ve learned the hard way, arguing against Amazon based on valuation is a losing proposition. Back in January I made just such a case. At that time, the worry was that Amazon was selling the Kindle Fire for less than it cost to make — and Wall Street always worries about Amazon’s costs and razor-thin margins.
But that wasn’t what bothered me. CEO Jeff Bezos always has managed the company beyond the quarterly demands of Wall Street’s expectations. More important was that the company’s strategy was sound. Amazon is an online retailer, and the new frontier in e-commerce is the tablet.
Rather, my argument was that the stock simply looked too pricey back then. The forward P/E stood at 87 vs. a five-year average of 56, according to data from Thomson Reuters. By trailing actual earnings, Amazon’s P/E was a whopping 92.
Well, Amazon is up 45% since I said it wasn’t a buy back in early January. Naturally, it’s even more expensive now. The forward P/E is up to 109 and the trailing stands at 315.
For a stock with a forecasted long-term growth rate of 33% a year over the next five years, that seems absurdly expensive.
Here are some other knocks:
- Amazon has missed Wall Street’s earnings estimates in three of the last eight quarters.
- It’s missed on the top line in four of the last eight quarters.
- It has a net profit margin of 0.7%. Hell, even Wal-Mart (NYSE:WMT) keeps a net of more than 3 cents on every dollar of revenue.
- Operating margins are less than 2%. Return on equity is about 5%.
But I’m done arguing against Amazon based on all those traditional, fundamental measures.
Because they don’t work.
Since going public back in 1997, Amazon is up 12,736%
In my defense, back in June, I did make the case that Amazon could be the next Apple (NASDAQ:AAPL):
There’s perhaps no other company that’s even a close analog to Apple, but when it comes to cashing in on the digital future, you’ve got to respect Amazon. Founder Jeff Bezos, like Steve Jobs, is an uncompromising visionary who takes the long view. Since Amazon’s inception, he has been unshakeable in his (very costly) determination to build an empire, quarter-to-quarter report cards be damned.
I still can’t bring myself to make a buy call on Amazon. I’m a boring, long-term, dividend-and-value kind of guy.
But I’m done putting out the hold and sell calls on Amazon.
As of this writing, Dan Burrows held no positions in any of the aforementioned securities.