In Greek mythology, the Amazons were a tribe of fierce warrior women. By most accounts, the Amazon River — which is the second (after the Nile) longest river, but, by far, the most powerful in terms of water flow — was named after the mythological warriors.
Amazon .com, Inc. (NASDAQ:AMZN)’s stock price, as well as the company itself, continues to live up to the company’s name. Like both the River and the warriors, the stock and company are POWERFUL. Like the River, the company is flowing just about everywhere. Like the warriors, it takes down competitors. Not just single competitors within an industry, but entire industries.
Prior to last week’s Q4 2012 earnings report, the company sported a P/E of about 3,600. 3,600! While 2012 revenue jumped 22% to $134.9 billion, earnings came in slightly negative (-$39 million or -.09 EPS), so its trailing P/E is no longer meaningful.
Its forward P/E is stated as 73, which seems reasonable. Well, “Amazon reasonable.” However, I don’t believe it’s realistic to think Bezos is going to change course that much within the year, and “allow” the company to show significant earnings, rather than keep plowing as much money as he can get away with back into growth. And, hey, if I were he — and Wall Street was giving me a leash as long as the Amazon River — I’d do the same. How many founder-CEOs of start-ups have ever been given a pass on conventional valuation measures for 18 years?!
As long as the analysts are playing nice-nice and shareholders continue to believe that big — make that HUGE — earnings and free cash flow will eventually arrive, Bezos is smart to run with it. The $61 billion (Amazon’s annual revenue) question, of course, is how much more slack exists in that leash? Personally, I think Bezos is well-attuned — remember, he used to work on Wall Street — to how fast and far Amazon can run with it without being jerked back in agony because the slack is gone.
However, with any stock extremely overvalued by conventional valuation measures, shareholders should always be ready to pull the trigger. If and when the tide turns on such a stock, it turns with a vengeance. I believe it’s more likely than not that Amazon will “grow” into its P/E and other conventional valuation measures. And that’s largely thanks to it being given the opportunity to do so.
To say Bezos has managed Wall Street extremely well would be akin to saying Amazon has a “decent” selection of books.
I’ve read a barrage of bewildered comments since Amazon’s earnings release — and subsequent stock price rise, despite “disappointing” earnings. While some were just incredulous, others were angry citing unfairness — especially compared to Apple Inc. (NASDAQ:AAPL)’s valuation and its 30%+ stock price drop since October.
Granted, Apple has always been given a too-short leash. Until very recently, it was cranking out huge earnings increases quarter after quarter, year after year, and yet its P/E remained (and remains) stuck at a pitifully low level.