In the capital markets, there is no such thing as a “sure thing”. The very nature of investing means that for someone to win, somebody else has to lose. The technical term is “zero-sum game”; I just call it common sense. However, if a unicorn investment did exist, its name would be Amazon.com, Inc. (NASDAQ:AMZN). Against its technology-centric peers, AMZN stock has the right mix of tangible and intangible attributes.
Primarily, when investors consider Amazon stock, they look at the e-commerce industry.
In the second quarter of 2017, e-commerce accounted for nearly 9% of total retail sales. This trend shows no sign of ending. But the more important aspect is that, at no point, did online retail sales recede. Even during the recessions that began in 2001 and 2008, e-commerce growth only went flat.
Needless to say, a robust underlying industry is a tremendous advantage — hence, the ever-rising AMZN stock price. But it’s not just the dominance in e-commerce, nor its disruptive nature in traditional retail, that makes Amazon formidable. As it made abundantly clear with the Whole Foods Market takeover, AMZN is not afraid to shock the markets.
Still, I can see why investors may be hesitant to jump on Amazon stock now. Year to date, shares have climbed to nearly 52%. A good chunk of that came recently, when AMZN gapped up to, and eventually breached, $1,100.
A good argument exists that the AMZN stock price has well exceeded its earnings growth potential. For instance, shares trade at 143 times 2018 earnings estimates.
Although I’m not a big “price-earnings ratio guy,” it’s not a metric to ignore, either.
AMZN Stock Is a Dominant, Disruptive Force
Nevertheless, in five or six years time, we may look at the AMZN stock price currently as a great deal. On the surface, it sounds absolutely insane. But, truth be told, Amazon may be the most realistic contender to become the first $1 trillion company.
Amazon started life selling books online. Now, the rules of engagement have changed to include almost anything. By purchasing AMZN stock at 143 times forward earnings, you’re speculating on events in which the company has consistently delivered. I love InvestorPlace contributor Vince Martin’s explanation.
Vince writes: “And ask yourself: is there a business you’d more rather own than Amazon? If so, the list is short. Apple Inc. (NASDAQ:AAPL) has the world’s most dominant brand. Facebook Inc (NASDAQ:FB) is visited daily by 18% of the world’s population. But no company is better-positioned across so many spaces, cloud computing, online shopping, artificial intelligence, than Amazon.com.”
In other words, the P/E ratio for Amazon stock is elevated because it should be.
Sure, the company has suffered some failures. Martin brings up the Amazon Local Register, which was supposed to compete against Square Inc (NYSE:SQ), among other things. But, by and large, AMZN keeps firing away; more importantly, it hits more than it misses.
Contrast that with the relatively low P/E ratio for traditional brick-and-mortars. J C Penney Company Inc (NYSE:JCP) trades at 16 times forward earnings. Or how about Sears Holdings Corp (NASDAQ:SHLD)? Sears sells for a price-to-sales ratio of only two pennies, better than 99% of its competition!
Of course, I’m being facetious. Nobody considers Sears a “great deal” because it’s so cheap relative to commonly cited financial metrics. Using the same logic, no one should consider the AMZN stock price overvalued due to cute mathematical tricks.
AMZN Stock Price Is Justified
I’m using extreme examples of the investment spectrum to illustrate a point about fundamental market analysis. Several brick-and-mortars appear to discounted because nobody wants them; since nobody wants them, the price has to go down to a certain level to attract buyers. I suspect, for Sears, that level will eventually reach zero.
Now consider Amazon stock. People are willing to pay a premium for its earnings because AMZN more or less will deliver on those earnings.
Some analysts will argue that its shares are no longer attractively priced. However, this line of thinking is open to debate. AMZN stock gives you a high probability of low-magnitude profits. SHLD gives you a low probability of high-magnitude profits.
If you enjoy gambling, then diving into the discount valuation bin may be your game. But if you want consistent success to varying degrees, ignore the noise and stick with AMZN stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.