Amazon.com Inc (AMZN): Don’t Pay Tomorrow’s Price Today

Let’s conduct a little experiment. Imagine that Amazon’s revenue continues to grow at 26.5% annually. Along with that, let’s say that free cash flow grows at the same rate, and I’ll use the 5-year average FCF of $2.01 billion as a starting point. Here’s the question: how long does it take for Amazon.com, Inc. (NASDAQ:AMZN) to generate enough FCF to be valued at 15x FCF based on today’s market price.

And that sums up the problem with Amazon. You’re paying tomorrow’s price today. All of the expected revenue growth in the world doesn’t mean anything if you’re overpaying by so much. People will claim that the Price/Sales ratio, which is 2.16, is reasonable for a retailer. Well, if that’s the case then Best Buy, which puts up similar FCF numbers to Amazon.com, Inc. (NASDAQ:AMZN), should be worth about 10 times its current market capitalization. Ultimately, sales mean absolutely nothing if they don’t generate profits. I couldn’t care less about sales. Profit is what matters.

The Bottom Line

People get emotional about Amazon. They start looking for any metric that justifies their position. In Amazon’s case, that metric is revenue. Amazon.com, Inc. (NASDAQ:AMZN) is a company which is very good at growing sales. But that’s not the kind of company I want to own. I want to own a company which is very good at growing profit. As a shareholder, you own the right to a share of the profits, not the sales. So do yourself a favor: don’t pay tomorrow’s price today.

The article Don’t Pay Tomorrow’s Price Today originally appeared on Fool.com.

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