Betting against Amazon.com, Inc. (AMZN) has proved painful to investors for more than a decade. With a 10-year return of almost 1,000%, AMZN stock has not only rewarded the faithful, it has punished doubters.
As one of the few dot-com companies to have survived the tech bubble, it is fitting that Amazon shares are trading near all-time highs the same month the Nasdaq regained that psychological 5,000 level — a mark not reached since March, 2000.
In fact, when you look at Amazon’s returns since the bursting of the tech bubble, which sent AMZN stock plummeting to a low of around $10, the shares have since soared 3,700% to its recent 52-week high of $389 reached on Feb. 26.
Bears Are Back
As is often the case after a run-up like that, the bears are back. The company’s market cap is now $176 billion, buoyed by 22% gain since its fourth-quarter earnings report. Based on the company’s 2015 projected earnings of 42 cents per share, the forward price-to-earnings multiple is over 900. Many investors believe it’s overpriced.
But here’s the thing: Amazon has always been expensive by every important valuation metric. It has appreciated in value over time despite Wall Street’s incessant demands for profits.
In the past five years, the trailing P/E on AMZN stock has averaged 505. As recently as December 2012, AMZN stock carried a P/E of 3659. And guess what AMZN stock has done since then? It has soared 55%, from $252 per share to its recent 52-week high of $389.
All told, AMZN stock does not play by conventional investing rules. So to point to its P/E — whether trailing or forward — as a meaningful valuation metric is foolish. It has never mattered to growth investors, who have gotten rich in the past decade.
Amazon isn’t the only dot-com survivor that trades this way. EBay Inc. (EBAY) is trading at its all-time high. Its trailing P/E is more than 1,600.
Amazon bears may ask, what’s going to be different this time? I think the company will begin to boost its bottom line, finally pleasing Wall Street. And that spells more doom for short sellers.
A Powerful Ecosystem
Amazon also will continue to grow revenue at impressive rates. After growing full-year revenue 20% in 2014, Bezos — by focusing on things like faster deliveries and growth in its Prime membership subscriptions — should boost top-line growth by 3-to-5 percentage points in 2015. That’s being conservative.
Amazon has created a shopping ecosystem which gives it dramatic operating leverage. This was seen in the 53% year-over-year jump in Prime memberships. Consumers love Amazon’s service and platform.
To that end, as its ecosystem and market share grows, Amazon will continue to slowly turn into a profit behemoth.
AMZN stock, despite its P/E, can still make money for investors. With growth tailwinds at its back, I think the shares can reach $450 to $500 in the next 12 to 18 months. At that range, I don’t want to consider where the P/E would be. I also don’t think it even matters.
At the time of publication, the author didn’t own any of the stocks mentioned.
