

Amazon P/E ratio 3x that of Apple and Google - marze
http://tech.fortune.cnn.com/2010/10/22/the-amazing-amazon-stock-bubble/

======
lsc
I actually think that amazon is sitting on an absolutely huge cash cow right
now with ec2. They have a very large and growing customer base, and they are
in a situation where they can slowly increase prices over the next few years
without anyone noticing or minding.

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.

~~~
evgen
The problem with this and all other claims here regarding cloud computing
being the future growth zone for Amazon is that they are far from the only
company out there that provides or is capable of providing these services, and
the switching costs are absurdly low for Amazon's customers. Right now they
may have the largest piece of this particular pie, but there is no particular
reason to believe that as the pie grows they will maintain their market share
or margins; we could all easily come up with a list of companies that could
jump in and drive Amazon's margins or market share down in the cloud computing
space.

 _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.

~~~
lsc
_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._

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.

------
smakz
"The bottom line is this: Amazon trades at more than three times Apple's
current valuation, eight times RIM's valuation and just about two and a half
times Google's valuation. This is simply way too high."

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.

~~~
hugh3
Y'know, I agree with you, but I think you're arguing poorly.

 _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"?

~~~
smakz
You're right, I'm not arguing very well. And please, I encourage any one not
to take what I say very seriously either. If you want to invest, think for
yourself, that is what I was really trying to say.

~~~
hugh3
Well yeah, I think that pretty much goes without saying. Nobody should ever
take a single "here's why I like stock X" article too seriously. But this one
does provide some pretty good food for thought for anyone thinking of
investing in computer/internet stocks right now.

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.

------
jakarta
Sometimes it is more useful to look at companies on a yield perspective, that
way you can compare them to "safe" assets and see how compelling a company
really is.

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.

~~~
krelian
You just made me looks at stocks in a whole different angle.

------
jamespitts
While a lot of people associate this company with info tech, Amazon shares
more characteristics with companies like Costco and Walmart. These types of
firms are focused on effective use of cash-flows in order to expand.

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.

~~~
jamespitts
Looking at the financials for the past few years, Amazon is paying down its LT
debt. This somewhat decreases the validity of my middle point.

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:AMZN&fstype=ii)
[http://www.google.com/finance?q=NASDAQ:AAPL&fstype=ii](http://www.google.com/finance?q=NASDAQ:AAPL&fstype=ii)
[http://www.google.com/finance?q=NASDAQ:COST&fstype=ii](http://www.google.com/finance?q=NASDAQ:COST&fstype=ii)

------
erikpukinskis
Maybe it's because they are so diversified. Google more of a one trick pony.
Their arnings could very easily plummet... all that's required is for a very
large number of people to start typing "bing" into their browser bar instead
of "google". Look how quickly people moved from Myspace to Facebook.

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.

~~~
Psyonic
Google's not actually as much of a one trick pony as you think, but let's
leave that aside. What about Apple? Rocking in every market they are in,
except perhaps the appleTV. Who's hotter than Apple right now?

~~~
meric
I wonder what will happen to Apple's products when Steve Jobs retires.

------
rbarooah
I can think of some reasons why they might be priced with the expectation of
massive growth:

\- 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.

~~~
cjlars
In my eye, ebooks are the big driver here. The core market for the Kindle is
older, wealthier individuals (read: investors) and sales revenue from ebooks
rose 173% last year, Amazon sells more Kindle books than physical books and so
on. It's all pretty impressive to the casual investor, who can feel like he's
making a good bet on the 'future of reading'. Even Barnes & Noble, who is
shackled by it's physical stores and has falling profits is trading at a
generous 23.5 P/E today. I'm passing on AMZN for sure.

~~~
zhyder
"has falling profits (and) is trading at a generous 23.5 P/E today"

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.

------
maxklein
My guess would be:

\- 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

~~~
stcredzero
_Amazon has a history of few failures_

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.

~~~
smackfu
Here's an interesting one: <http://www.endless.com/>

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.

------
marze
I've wondered about this.

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.

~~~
Gibbon
It doesn't make any sense to me for the author to compare three companies that
have nothing to do with each other. One if a all-purpose retailer, one a
hardware company and one sells advertising.

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.

~~~
robryan
To be fair Amazon and Google are more or less in direct competition with their
cloud offerings. Also Amazon and itunes for that matter.

------
ojbyrne
Apple sells computers, Google sells online advertising. Amazon sells
_everything_.

~~~
cosmicray
> Amazon sells _everything_

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).

~~~
wanderr
Put another way, Amazon also sells market space.

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austinalter
This kind of balance sheet punditry is silly, it's just numbers and no
context. Since the beginning Amazon's top priority has been growing revenues.
If they started pursuing margins as aggressively as they've been pursuing
growth they could probably drop that P/E pretty quick.

------
8ren
Stockholder's equity has grown at over 100% (about 109%) over the last 2
years:
[http://finance.yahoo.com/q/bs?s=AMZN+Balance+Sheet&annua...](http://finance.yahoo.com/q/bs?s=AMZN+Balance+Sheet&annual)

ie. more than doubled annually.

------
marze
Amazon is growing, no doubt. They should have a premium on their stock price,
but Apple is also growing rapidly and has a much smaller premium.

Maybe Apple is seriously undervalued.

~~~
Psyonic
Now there's a bubble bursting attitude! When one stock seems to be excessively
overrated... it's really that all the other stocks are underrated.

I like the cut of your jib, my friend.

------
zhyder
General point about P/E and P/(E * G) ratios:

\- 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.

------
artsrc
Apple and Google seem quite global.

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.

~~~
smackfu
Net sales for 2009 were 52% US, 48% international. They don't break down the
international category.

------
bobf
One of the most interesting things about Amazon is how they have iterated
their business over time - from a website selling stuff to a marketplace to
becoming a platform (in multiple areas).

------
jcnnghm
I think Amazon is worth it. Sun launched cloud computing
([http://slashdot.org/article.pl?sid=05/02/02/1839225&tid=...](http://slashdot.org/article.pl?sid=05/02/02/1839225&tid=102))
all the way back in early 2005, while Amazon didn't even start public beta
testing until August 2006. The real appreciable difference is marketing and
positioning. When Sun launched their service, nobody could tell why it was
interesting, when Amazon launched they created an industry.

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.

~~~
artsrc
Here are two perspectives share price:

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.

~~~
jcnnghm
I'm aware of that. The market for cloud computing should grow 50-100x in the
next ten years, and Amazon is well positioned to capture almost all of it,
with declining costs and increasing profit. Not only that, they will be a
serious threat to iTunes with their book distribution. They should also be
able to displace Craigslists and Ebay for the sale of used goods. Their
service is easier, faster, and usually generates higher prices.

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.

------
BCGC
Did the guy own any of these three stocks and others???

