The Appeal Behind the $1 Trillion Market Cap in Amazon Stock Is Trivial

The $1 trillion market cap of Amazon is the worst possible reason to buy AMZN stock

Why Amazon Stock Could Be Hurt by a Lack of Focus

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Unless you’ve been living under a rock for the past few weeks, you’re probably well aware that Amazon (NASDAQ:AMZN) has crossed the $1 trillion market capitalization level. Although most AMZN stock investors are likely aware of this, not everyone is aware of the potential long-term ramifications of AMZN reaching this benchmark. Or does it really matter at all?

Before I discuss the potential ramifications for Amazon stock, let’s take a quiz:

  1. Who ranks eight all-time in home runs in Major League Baseball?
  2. How many people from New Zealand have won Nobel Prizes?
  3. How many bones are in the human foot?
  4. What is a heptagon?
  5. How many Beatles songs hit the Top 10?

You might ask me what the accomplishments of 1) Jim Thome and 2) the three Kiwi Nobel Laureates have to do with anything.  Moreover, many of you have lived your lives not realizing that the human foot has 3) 26 bones or that a heptagon has 4) seven sides or that 5) 20 Beatles songs topped the charts.

What do these factoids have to do with Amazon $1 trillion market cap? They are all trivial.

While it’s noteworthy that AMZN is worth more than the combined market caps of Walmart (NYSE:WMT), Target (NYSE:TGT), Costco (NASDAQ:COST),  it isn’t a compelling reason to buy or sell AMZN stock because it doesn’t necessarily mean that the good times will continue.

For one thing, Microsoft (NASDAQ:MSFT) and Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) will likely hit the $1 trillion mark in the next few months.

Facebook (NASDAQ:FB) could join the club as well if it can ever get its act together. When compared to these other tech bellwethers, Amazon stock’s valuation of 90 times next year’s earnings is out of whack compared with 25 times for Microsoft and Alphabet and 17 times for Apple (NASDAQ:AAPL) and the S&P 500.

Amazon’s recent second-quarter profit of $2.53 billion, or $5.07-per-share, was spectacular — a gain of more than 1100% from the year-earlier period as the Seattle-based company’s investments in cloud computing and its Amazon Prime service continue to pay off. The company also earned kudos from Wall Street for controlling its cost growth.

As the Wall Street Journal noted, Amazon’s profits are still well below its peers, including Apple, Alphabet and Microsoft because AMZN CEO Jeff Bezos has repeatedly shown a willingness to open his checkbook for everything from the Whole Foods upscale grocery chain to original video content, including The Marvelous Mrs. Maisel, even if the payoff isn’t immediate or ever going to happen.  Some of his experiments work and others don’t.

Bezos has never participated in AMZN’s quarterly earnings conference calls because has he has noted in every shareholder letter since 1997 that he’s focused on managing the Seattle-based company for the long-term.

Over its history, Amazon stock has repeatedly defied the naysayers who didn’t think that buying books online would ever be a thing. Investors who went with their guts were rewarded because relying on the common metrics to analyze Amazon stock doesn’t work because AMZN is anything but a typical company.

If you are willing to take that leap of faith, by all means, buy AMZN stock. 

As of this writing, Johnathan Berr did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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