Amazon.com stands tall as one of the most highly priced stock. It invested $ 18.5 billion and is harvesting profits and is the most expensive stock on S&P’s 500 index. It is unique in that its stock prices are 700 times its earnings, which position it has held consistently for the past nine months but which is in danger of being eroded. Though profits are pouring in from digital computing and
cloud computing segments, the ratio may diminish to a surprisingly lowly 48 by next year, derating stocks to 10th most costly, if we are to believe a Bloomberg analysis.
Investors continue to remain upbeat foreseeing higher earnings for Amazon through increased sales of books for the Kindle, movies and music in addition to other products. They also believe the profit margin could increase in the current year in the wake of Amazon building its own warehouses and capabilities to deliver more products through its online store.
According to Tom Forte of the Telsey Advisory Group investors have faith and are open to a higher valuation of the stock. With an initial start in books, Seattle based Amazon has gone on to become an online global mall for just about everything; the dot com bubble burst only spurring it to push more for growth against profits. Amazon shares have risen 98 percent since 2009 despite a loss of $ 39 million in 2012, a decided slump when compared to a profit of $ 1.15 billion in 2010. However, revenues increased by 27 percent, reaching a figure of $ 61.1 billin in 2012. It is expected to gain another 24 percent increase in this year according to Bloomberg analysts. Bezos, the owner, could be on his way to having a net worth of $ 24.9 billion which would make him the world’s 19th richest person. The popularity of Amazon contributed to a higher share price despite a drop in earning, thus inflating the price-earning ratio. In comparison Apple PE is only 10 whereas Ebay’s is 28; both far below Amazon’s projected low of 48 by next year. Investor confidence continues to run high and the perceived sentiment is that strategic investments will push Amazon even higher. The current dip is perceived as only a normalization process not due to earning capabilities said a bouyant shareholder who only viewed it as an opportunity for smart investors to gobble up stock in the expectations of a rise.
Amazon has smartly invested in critical infrastructure which is warehouses for itself and which it also offers to other online merchants. The investments in warehouses increased by 58 percent in 2011, going in a straight upward trajectory for the second year. It also rakes in pure profits through its fulfillment centers that cater to small and medium online retailers who pay a fee for usage. This emulates Ebay’s system that has been raking in 21 percent margins but significant is that Ebay does not have any stock of goods and serves as a conduit. Amazon stocks and sells and the profit may not buouy up as quickly as expected leading to reduction of share prices and P-E. The model adopted by Amazon may show a decline in business growth rate leading to reduced fees for Amazon that contributed to 45% of gross profit. Doug Anmuth of JP Morgan Chase & Co arrived at this analysis and gave a reduced neutral rating to Amazon. From a high of 788.86 in January, Amazed share declined to a figure of 740 times on March 28 following the disclosure that the fourth quarter revenue did not match expectations and was lower than the figure for the previous year. However, it overtook Equity Residential and still held the position of having the highest value on the S&P 500 Index.
Investors may be banking on the success Bezos achieved with a revolutionary investment in cloud computing about eight years ago. Amazon Cloud today has a lion’s share of the market. However, expenses relating to content and technology rose to 59 percent following implementation and progressively reduced. Amazon share prices also fell by 11% in 2006. Since then expenses on technology and content reduced but margins rose and share prices gained a four fold increase to $ 180 in 2010 year end. Investors are banking on history repeating itself and Amazon going on to do well.