Amazon P/E ratio 3x that of Apple and Google
tech.fortune.cnn.com
tech.fortune.cnn.com
By "raise prices" I mean, of course, lower them slower than their costs drop. that's just how it's done in this industry; nobody actually increases prices.
I went to a talk the other night by netflix; they were talking about how they moved all their stuff into the ec2 cloud. Now, first, this is costing them a huge premium over owning hardware, even as is. Now, just think, if amazon decreases prices slower than their costs fall (which will fall approximately with moore's law) think how much work it is for netflix to move off of ec2.
"But," you say "Power isn't getting any cheaper!" which is completely true, of course, but the amount of compute power I get for a watt of electricity is dropping approximately in line with Moore's law, so as a provider, you can pretty much bank on your ongoing costs decreasing dramatically every hardware refresh.
Amazon is in an excellent place right now. I don't know that it justifies a 67 P/E ratio, but depending on just how big ec2 is, and how many other large corporations start outsourcing to them, it very well may be worth more than that.
Now, just think, if amazon decreases prices slower than their costs fall (which will fall approximately with moore's law) think how much work it is for netflix to move off of ec2.
It takes almost no work at all. If some bean counter at Netflix tells their board next year that they the current cost/benefit ratio for EC2 now makes no sense it would take Netflix less than a month to move to another cloud provider and less than six months to move everything in-house again.
There is no switching cost and with more providers entering the space you are already seeing early arbitragers get into the game. This is going to exert strong downward pricing pressure on all vendors in this space. They are selling what is effectively a commodity, and there is no way they are going to maintain their margins for much longer.
If AWS and a bet on a future of fat profits from the cloud is what punters are using to justify this P/E they are making a costly mistake.
if this were true, netflix would have never moved to the cloud in the first place, because like I said, even right now, at scale that is ridiculously small compared to neflix, it's pretty easy to beat amazon on price.
Now, first, I mostly agree with your assessment, if we limit the field to smaller companies where the people who own it are still involved with running it, and where people in positions of power have experience running cheap data centers.
But, I think the rules are different for "the enterprise." many of the large enterprises I've worked for ended up paying many times over what a company with more data center experience on the board (or in the beancounters) would would pay for compute infrastructure. You've seen the enterprise sales process... the whole system is set up to extract as much money as possible from the enterprise in question.
I saw one company that was paying a thousand bucks a month for mid-spec servers to a well-known infrastructure outsourcing company; servers that would cost me close to $2000 total capital cost, and then $100/month in power/bandwidth. According to this company's bean counters, paying that huge premium was actually cheaper for the company than buying and hosting in-house.
As for moving from amazon to another outsourced infrastructure provider... well, the problem is one of sales. Amazon is the only company in it's space that I know (with the exception of rackspace, maybe?) that has the credibility to be used by the enterprise without sending a sales guy over. This is incredibly valuable.
The article is almost laughable in it's simplicity - if you take CNN/Fortune articles seriously please don't invest your money. This article is overly focusing on one antiquated notation that P/E is the only thing that matters, an idea that isn't taken seriously by anyone close to Wall Street or finance any more (if it ever was, seems like this idea is only perpetuated by "pop" finance drivel such as Fortune).
There are several more interesting metrics to look at when evaluating a stock, including cash flow, profit margin, return on equity, growth rates, and many more.
Amazon has been consistently growing in double digits throughout the recession. They have a profit margin of 3% (compared to Apple's lofty 20%). They have a market cap of 80 billion with annual sales of 24 billion versus Apple's market cap of 280 billion with annual sales of 65 billion.
Where is Amazon's growth ceiling in their respective markets? Where is Apple's? What is next for Apple after the iPad (which missed sales targets)?
If you are going to invest in a stock, you need to ask these tough questions and think for yourself. You can't just look at a P/E ratio and know whether a company is over or under valued. Amazon rode the recession with a 40+ P/E ratio, and now the market is picking up again. Decide for yourself whether it is risky or not to invest in AMZN.
one antiquated notation
Just because an idea is old doesn't mean it's bad.
that P/E is the only thing that matters
I hate to say "strawman", but strawman. Is it really saying that P/E is the only thing that matters? I think not, otherwise it wouldn't say things like "top line growth in many ways is far more important than earnings per share."
an idea that isn't taken seriously by anyone close to Wall Street or finance any more
Argument from (dubious) authority?
only perpetuated by "pop" finance drivel such as Fortune
Scare quotes and the use of the word "drivel"?
I think I'd avoid GOOG and AAPL personally, too overpriced. Mind you, I've been saying that about GOOG since the float, so I'm frequently wrong.
In this case, Amazon features an earnings yield of: 1.4% and a Free Cash Flow yield of: 2.1%
10 Year US Treasuries are yielding 2.57%
Amazon, like Netflix, is run by a great operator. Both companies are trading at sky high valuations and it leaves little room for error. I could see both companies coming out on top, but I don't see much safety in either stock.
Treasuries price moves inversely to the yield, so that should be taken into account when comparing to them. CD is probably a better point of comparison.
The PEs of superstores do not reflect the fact that they use much more debt than pure-tech firms. This debt contributes to cash-flows, which contributes to expanding operations. While Amazon may not be able to add new big-box stores with this cash, it can add more ads. Take a look at Amazon's return on equity (of which LT debt is a component) and you will see a brighter picture than depicted in this article.
PE is just one measure, and it is easily distorted in the short-run. Look at the business as it relates to the market price, and then compare it to other like businesses.
Perhaps the PE is high because their profit margin is expected to increase above what is normally associated with retail operations (razor-thin). After all, Amazon is delving into more tech-centric lines of business.
http://www.google.com/finance?q=NASDAQ:AMZN&fstype=ii http://www.google.com/finance?q=NASDAQ:AAPL&fstype=ii http://www.google.com/finance?q=NASDAQ:COST&fstype=ii
But Amazon is entrenched not just in books, but in many other retail markets, digital music, movie rentals, and cloud computing. The likelihood that they'd get trounced in all of those markets simultaneously is slimmer, just because there are so many of them, and they don't have any single competitor who could wipe them out.
Facebook is a much better product than Myspace. I can't say the same about bing.
- The nascent cloud computing business
- The potential to be the iTunes of books (the kindle store independent of the hardware)
- No serious competitors in terms of becoming the wal-mart of online retail and a huge reservoir of expertise in this area.
The real question is whether this is all now rationally factored into the price.
23.5 is not generous at all if the denominator is tiny (coz of the falling profits). P/E is actually pretty meaningless when E is small coz of low margins [1], since small transient changes in margins (e.g. .1% to 5%) can make P/E vary wildly. And it's even more meaningless when E is negative.
[1] The exception being when the low margins are steady, and hence predictable.
- People understand or think they understand Amazons business
- Amazon has a history of few failures
- Amazon is establishing a physical and technological infrastructure that a lot of other companies will build up on. It's like an operating system in a way, and this will be converted into huge money in the future
I think Amazon fails all the time. I think it tries to get the opportunity to fail as often as it can. However, Amazon's failures are mostly small scale, and not visible in the press.
It was their competitor to Zappos. Shoe-focused, free overnight shipping and returns. I would call it a failure since they subsequently bought Zappos. But like you said, not very visible since they never shut Endless down. No real point, since it's just another skin on Amazon.com.
The explanation can only be that investors expect Amazon to continue to grow revenue and profits at a high rate. How reasonable is this expectation?
I've always thought that the intense competition in the on-line retail world would eventually result in lower profit margin for everyone including Amazon, but I hesitate to bet against such a well run firm.
That being said, Amazon is the runaway freight train in online retailing. With sales of $24.5 billion, there isn't anyone else even remotely close. Staples is no.2 at $9.5 billion and Walmart is an order of magnitude smaller than Amazon.
Amazon are on a tear this quarter with net sales growing 40%.
Now you add in their position as a leader in cloud-computing, along with the kindle.. and I think their future prospects are great.
* Woot (leading deal of the day site)
* Stanza (leading e-reader)
* Zappos (leading shoe retailer)
* dpreview.com (leading camera review site)
* AbeBooks (leading used book marketplace)
* Audible (leading audio book seller)
* BuyVIP (group purchasing)
* Amie Street (online music)
There model seems to be to try to compete with a home-grown offering, and if it doesn't work, buy the competitor with their cash.
Economies of scale create a cheaper alternate solution. That was accomplished in physical goods years ago and the cost of "transporting" physical goods is much higher than the cost of "transporting" massive data processing power.
It's easy enough to produce compute units at a lower cost than amazon. I'm doing so even now... and you can bet your bottom dollar than amazon is going to lower their prices more slowly than costs fall.
But that's why amazon is in such a strong position right now. They are basically positioned to become "the oracle of cloud computing" - Who cares if it's slightly more expensive... if you are a middle manager in a large corporation, paying another 50% or even a few hundred percent more is no big deal if it greatly decreases the chance of a big meltdown. And more to the point, if it protects you from blame when there is a meltdown.
edit:
This is what I hope will happen, anyhow, because if amazon wanted to scrap with me down at the bottom, you are right about those economies of scale. they could crush me like a bug.
But I don't think they will. I think they prefer to just take their efficiencies as profit, and target the larger customers who are willing to pay extra for the comfort of a big name
Amazon itself, sells many things. Everything listed on Amazon is not offered by Amazon tho. Much of Amazon's wide breadth of inventory is supplied by independent retailers. So, Amazon is both a retailer, and an operator of a marketplace (of 3rd party sellers).
Amazon and Google both provide datacenter services.
The similarities don't extend much beyond either of these points.
Oh, and all three are headquartered in the Pacific mid-to-northwest.
ie. more than doubled annually.
Maybe Apple is seriously undervalued.
I like the cut of your jib, my friend.
- P is at a snapshot in time, but
- E is over a period of time (can be short/long, past/predicted-future)
- G (growth) is over a period of time (can be short/long, past/predicted-future)
G is usually the predicted value, and -as you'd expect- predictions can vary a lot, making PEG vary wildly.
The G used in this article is one determined by some unnamed analysts, but the market thinks the analysts are wrong by a factor of 2.
What percentage of Amazon's revenue comes from the high growth Asian economies? What percentage comes from a temporarily recession ridden US, or low growth Europe?
RIM on the other hand seems like it could be dead in the water, the Palm of a new generation. That is why it trades at a P/E of 8.
What I think makes Amazon worth the money is their ability to enter a market that is incidental to online retail, and dominating it so thoroughly so quickly. If I heard Google was entering my market, I would be nervous, if I heard Amazon was entering my market, I would run.
First value - you can think Amazon will dominate a market. To know if they are worth a price, you need some idea of the their earnings in that market and the return you want.
Another perspective is special insight. A company that executes wonderfully and that everyone can see is just brilliant is probably not undervalued. It is probably fairly valued because everyone agrees. To have a view that Amazon is undervalued you need to have some special insight that others in the market don't have. You don't care what the current view of earning is, the market has already taken that into account, you know they are going to do something wonderful that others don't. You buy based on that and sell once the insight is more broadly known.
The analysts are still undervaluing cloud services, and haven't really talked too much about the Amazon marketplace ecosystem. Ebay is worth about $37B alone, so if Amazon can soak up chunks of that market, their value will go up tremendously. Used goods can probably still grow 1,000x at Amazon. Also, expect major growth in their fulfillment services. Once awareness of that picks up, they can probably take that industry and do long-tail order fulfillment for everyone selling anything online, through Amazon or not. Like I said, Amazon is definitely worth a 3x premium on Google, simply because they have so many different places they can grow revenue, and almost everything they're getting involved in has the potential to be huge businesses with clear paths to revenue.