Amazon Is the Cheapest Mega-Cap in the Long Run

There are some stocks that you can rarely go wrong owning them in the long run. Eventually they’ll end up delivering capital appreciation. Amazon (NASDAQ:AMZN) has been an incredible company for over a decade. Consequently Amazon stock remains on fire in spite of tremendous skepticism.

Walmart's Robot Is Only a Minor Threat to Amazon Stock
Source: Hadrian / Shutterstock.com

This is the best example of a growth company the world has ever seen. You can even call it a startup even now because of its perpetual expansion of its scope. Going into its earnings report creates short-term guessing but stick with it. The skepticism of the experts has so far been wrong.

Their business model is to find new venues to disrupt and profit from them. They have been on a growth trajectory like none other before them.

At times it looked like it was teetering. Shorting it has so far been most definitely wrong and painful for those who tried it.

In the earlier days pundits called it too expensive. They get nervous when managements spend a lot of money, even when the stock price action tells them it’s OK. From spending this team delivers astonishing rewards. It is unwise to doubt what this company can do under the leadership of its founder and CEO Jeff Bezos.

Don’t Expect Amazon Stock to Be Cheap

Amazon (AMZN) Stock Chart Showing Long Term Success
Source: Charts by TradingView

Fundamentally, not many experts call it cheap and I am here to tell you it is. Investors immediately point out its very high triple-digit price-to-earnings ratio. The truth is it’s ridiculous to use that as the metric for valuation because it grows 30% a year for over 10 years. Management tripled its gross profit now since 2016, and net income grew more than 7 times. Using profitability as a gauge for value is inherently wrong. There’s no way a company can account accomplish these tremendous growth spurts without spending a lot to do it.

Their opening act was to disrupt shopping first books then all together. They saw the future a decade before the rest. It took a pandemic to spur the world to seriously join in. The retail industry almost went broke, and companies who didn’t adapt died. Other industries also suffered. Just ask FedEx (NYSE:FDX) and UPS (NYSE:UPS). Not even shipping giants were alee from the AMZN onslaught. They had to reinvent themselves just so they don’t get left in the dust.

Then out of nowhere they created and owned the cloud. Amazon beat all the high-tech companies to it. Now Microsoft (NASDAQ:MSFT), Alibaba (NYSE:BABA), Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and IBM (NYSE:IBM) are playing catch-up. By the time they do, I bet Bezos will have already started revolutionizing another industry. You can create a game out of it: “What will team basis invent next?”

On Feb. 1, 2019, I wrote about not selling AMZN stock from its earnings reports miss. Experts on TV have a habit of calling it untouchable during its spending stints. But that’s how they come up with the cash-cows that they now have. The stock doubled thereafter. Clearly there is a street-wide misunderstanding of this great company’s value.

AMZN Is the Cheapest Giga-Cap Stock

Recently I wrote about Amazon stock and my message was to own it because it’s cheaper than AAPL. That statement always brings out a chuckle but I have proof. Its price-to-sales (P/S) is the lowest of all mega-cap growth companies and that includes Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Microsoft. Those who buy Amazon stock today are giving it credit for only 4.7 years of sales. That’s 40% less than AAPL and 2.5 times cheaper than MSFT. For another absolute comparison, Tesla’s P/S is 7 times more expensive.

Two things contribute to this myopic distorted view. First it’s high P/E ratio. Second is its high stock ticket price. It’s hard to fathom that a $3,200 stock could be cheap. Instinct is for people to see low dollar stocks as cheap, which is completely false. If that were the case then we should all be buying penny stocks.

Don’t confuse my high opinion of the company with a call to go all in. It’s never a good idea to buy the whole lot at once. Amazon is going into an earnings event and the short-term reaction to these is always binary. I remember writing about buying the dip into $800 per share a few years ago, if you can believe that. The proper thing to do is to accumulate shares over time. Besides, currently the stock market in general is too high. The situation on Main Street is horrendous yet Wall Street has blinders on and it’s still trying to break records. Regardless of how good the particular situation of a stock including this one, investors need to heat a little caution.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Nicolas Chahine is the managing director of SellSpreads.com.


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