Amazon: Baffling The Orthodox ‘Value Investor’


Amazon Inc. (NASDAQ: AMZN), the online retailer, is trying hard to sell almost everything and anything and is fast becoming the no. 1 enemy of every possible brick and mortar retailer. The Amazon stock is one stock which has baffled the value investors for long. The insanely high and ridiculous P/E level the stock has been trading at for over a decade has often kept the staunch value investors away from the stock. However the P/E has stayed in the skies for quite some time now, and with every expectation of the stock price crashing, the price has only inched higher to prove the value theorists wrong. However, a closer look at the financials of the firm reveals some interesting facts. The only constant in the company’s financials over the last 10 years has been the increasing revenues. The revenues have raced over the last 10 years at a rapid growth rate of over 30% every year.  While the profits have been left far behind, the stock price has kept the pace giving average returns of close to 20% every year for the last 10 years. This makes it clear as to what is it that investors value in Amazon. The stock price movement, which seems insane looking at the earnings of the company, feels more rational when you see that the Price to sales ratio of the company has in fact declined from 4.19 in 2003 to 1.86 in 2012. The revenue growth of the company has in fact outpaced the stock price gains.

We would like to point out a report released by Bernstein research, which states that Amazon’s entry into Groceries and any other products it isn’t retailing ‘yet’ presents a huge opportunity for the firm. The report states that the opportunity ahead for Amazon could lead the company to a point where its annual revenues touch $ 220 billion. We also know that historically the market has valued the revenue growth at Amazon and given a second preference to its profitability. If the numbers in the report do materialise, it would mean that Amazon’s annual revenues jump from their current levels, around $65-70 billion to close to $200 billion. The lowest Price to sales ratio for Amazon over the last five years has been 1.065. To put things in perspective Wal-mart currenlty enjoys a P/S of close to 0.55 with annual revenues of $470 billion. Considering that the market will continue to value the revenue growth of the company, it won’t be surprising to see the stock price cross $450 if the $200 billion in annual revenues does materialise. The AMZN stock closed the last trading session at $312.06, a marginal gain of .01% over the last closing price.

To see Amazon’s latest stock price movement, click here (NASDAQ: AMZN)

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Disclaimer: We do not hold any stake in the aforesaid stocks. For detailed disclaimer, please click here.

Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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