Is Amazon’s Stock Price Justified? What It Means If It Is (2017)(cepr.net)
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Is Amazon’s Stock Price Justified? What It Means If It Is (2017)
https://cepr.net/is-amazon-s-stock-price-justified-what-it-means-if-it-is/
52 comments
The author of this 2017 article is probably shocked that Amazon's PE ratio has since gone from 184 to 70, while the stock price went from about 1000 to 3700. The author should have realized that there was still a huge untapped market for cloud services in 2017. It would have been foolish to short the stock four years ago, but, with the departure of Bezos, one has to wonder how much longer AWS can continue to keep the big profits flowing for the company. Rather than focusing on PE, the author should have focused on whether or not there is still a huge untapped market for cloud services. I'd focus on that metric before deciding to short AMZN.
An equivalent question:
If you had $2T in cash, and you were to buy all of Amazon's outstanding shares, taking it private, to own it forever, earning your money back from the company's profits year after year, after subtracting all amounts reinvested in the business -- in the same manner you would do it with, say, an apartment building, would you ever recover your $2T investment? What kind of annual return do you think you would you earn over the remaining life of the business?
If you had $2T in cash, and you were to buy all of Amazon's outstanding shares, taking it private, to own it forever, earning your money back from the company's profits year after year, after subtracting all amounts reinvested in the business -- in the same manner you would do it with, say, an apartment building, would you ever recover your $2T investment? What kind of annual return do you think you would you earn over the remaining life of the business?
A 0% interest rate implies that this is a good bet on an unlimited time horizon, a theoretical investor could borrow from the fed and use the money to purchase any profitable company at any price and earn a return eventually.
The only bound is how much money can be borrowed at an interest rate lower than the future expected free cash flow of the business.
The only bound is how much money can be borrowed at an interest rate lower than the future expected free cash flow of the business.
Only short-term rates are close enough to 0%. Are you talking about borrowing short-term at 0% to invest with an unlimited horizon, exposing yourself to massive interest-rate risk?
This is spot on. And it shows how the stock market has essentially become a sort of mix between a pyramid scheme and gambling, in which its participants buy stock betting on the price going higher and being able to dump it on someone else in the future to make a profit.
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Isn’t that a bit of a silly question?
The share price should reflect future earnings. If you are a shareholder, you believe that amazon will continue to grow and that other people will continue to value its future earnings higher than the price you purchase at.
Amazon’s strategy is not (solely) to make a profit. It’s strategy is to invest in growth, sometimes in such a way that makes a loss or scant profit, to dominate markets in a way that gives them sustained competitive advantage.
If you bought Amazon and asked them to switch to simply profit making, then they could can a lot of the future growth stuff to get your trillions back. Comparing them to an apartment building which can only grow in line with a wider market (ignoring subdivision of apartments etc) is just a weird false comparison in my eyes.
The share price should reflect future earnings. If you are a shareholder, you believe that amazon will continue to grow and that other people will continue to value its future earnings higher than the price you purchase at.
Amazon’s strategy is not (solely) to make a profit. It’s strategy is to invest in growth, sometimes in such a way that makes a loss or scant profit, to dominate markets in a way that gives them sustained competitive advantage.
If you bought Amazon and asked them to switch to simply profit making, then they could can a lot of the future growth stuff to get your trillions back. Comparing them to an apartment building which can only grow in line with a wider market (ignoring subdivision of apartments etc) is just a weird false comparison in my eyes.
What part of the comment you replied to implied that Amazon would never grow? The entire OP is about the growth that Amazon would have to do to fulfill certain scenarios (that would result in expected profit for investors.)
What I’m trying to point out (maybe I did a bad job!) is that it doesn’t make sense to try to run the numbers of how long it would take to return an investment in purchasing Amazon in profit, considering if returning investment capital in profits was Amazon’s goal they would behave in a profit maximising way rather than a growth maximising way. I just don’t think it’s the right question to ask (how long would it take to pay off buying Amazon from Amazon’s current profit margins) because the answer wouldn’t tell you anything interesting about how to value Amazon.
> …company's profits year after year, after subtracting all amounts reinvested in the business…
This does not mean the business will chase profits instead of growth.
I believe he’s paraphrasing value investing as described by Warren Buffett. I’d guess other investors have said the same thing although Buffett is quite well-known.
This does not mean the business will chase profits instead of growth.
I believe he’s paraphrasing value investing as described by Warren Buffett. I’d guess other investors have said the same thing although Buffett is quite well-known.
> The share price should reflect future earnings.
In particular, the market cap of a company should theoretically be equal to the net present value of all future and current cash flows. Therefore, (again, theoretically), if AMZN is priced correctly, the answer should be that you will break even, eventually.
Seen in this light, the company's job is to ensure that its stock is not priced correctly -- that you should actually be able to make a profit by buying AMZN (even the entire company) today.
In particular, the market cap of a company should theoretically be equal to the net present value of all future and current cash flows. Therefore, (again, theoretically), if AMZN is priced correctly, the answer should be that you will break even, eventually.
Seen in this light, the company's job is to ensure that its stock is not priced correctly -- that you should actually be able to make a profit by buying AMZN (even the entire company) today.
When is eventually? In infinity years?
Every time a company like Enron fails with positive stock value that theory is demonstrated to be objectively false.
As we know that theory is wrong we should discard it, which then opens the question back up. Anyway, expectations of future earnings are far from the only way stocks are valued. If you can predict a short squeeze for example you expect a jump in price independent of fundamentals.
As we know that theory is wrong we should discard it, which then opens the question back up. Anyway, expectations of future earnings are far from the only way stocks are valued. If you can predict a short squeeze for example you expect a jump in price independent of fundamentals.
Please don't attack a straw-man. As I wrote above, we're talking about profits "after subtracting all amounts reinvested in the business." So, taking into account all that future growth, will the company's future profits, after subtracting all amounts reinvested in the business, justify its price today?
Sorry, I didn’t mean for it to come over as an attack - but I don’t think it’s a straw man.
What do you think doing that would say about Amazon’s value? Why does that matter in justifying its price today?
What do you think doing that would say about Amazon’s value? Why does that matter in justifying its price today?
The current stock price is always a prediction of future earnings x the probability of those earnings. A lottery ticket might in theory be worth 50 cents but have a high probability of being worth nothing.
In essence guessing if a stock is likely worth it’s current price is asking if it’s a low variance bet (T-Bills), high variance bet, or miss priced.
In essence guessing if a stock is likely worth it’s current price is asking if it’s a low variance bet (T-Bills), high variance bet, or miss priced.
> The current stock price is always a prediction of future earnings
Maybe in theory, but in practice, at least currently, that’s not how the market is behaving.
The current stock price reflects the aggregated sentiment of past transactions regarding the probability of the actors being able to turn a profit now vs later. The person who is selling is either acting on the sentiment of cutting losses or realizing a gain, while the one buying is acting on the sentiment of the expectation of future gains.
Earnings might be one factor that informs sentiment, but it is not the only one or even the most important, especially for retail investors using Robinhood for example.
Maybe in theory, but in practice, at least currently, that’s not how the market is behaving.
The current stock price reflects the aggregated sentiment of past transactions regarding the probability of the actors being able to turn a profit now vs later. The person who is selling is either acting on the sentiment of cutting losses or realizing a gain, while the one buying is acting on the sentiment of the expectation of future gains.
Earnings might be one factor that informs sentiment, but it is not the only one or even the most important, especially for retail investors using Robinhood for example.
Are you taking a narrow view of earnings? As far as a stockholder is concerned a company being bought out qualifies as earnings even if they never turn a profit and are only bought for their IP.
You are right. I understood earnings as company earnings, as that is usually the meaning in the context of stocks. Now I realize you were talking about the stockholder’s earnings.
> Isn’t that a bit of a silly question?
Given how bonkers all investment classes are right now, it’s a pretty sane question to me. Also, tagging a seemingly honest question as silly feels a bit harsh to me.
Given how bonkers all investment classes are right now, it’s a pretty sane question to me. Also, tagging a seemingly honest question as silly feels a bit harsh to me.
I really like your way of thinking. Would we take any growth into account?
Are stocks (and real estate) just an appealing store of value for wealthy people? Are changes in typical price to earnings ratios over time just a marker of inflation?
Edit: looks like the P/E ratio almost doubled in 2021 from 20-25 to 40-45. Is that just because revenues were down during COVID, or is it where all the stimulus spending ended up? https://www.multpl.com/s-p-500-pe-ratio/table/by-year
Edit: looks like the P/E ratio almost doubled in 2021 from 20-25 to 40-45. Is that just because revenues were down during COVID, or is it where all the stimulus spending ended up? https://www.multpl.com/s-p-500-pe-ratio/table/by-year
We never really let up from the quantitative easing implemented a decade ago, with QE4 being conducted in response to the pandemic.
Interests rates are already low, and it seems like a conscious choice not to raise them because of the potential negative implications.
Everyone seems to be buying assets, whether financial or real, as a result.
Interests rates are already low, and it seems like a conscious choice not to raise them because of the potential negative implications.
Everyone seems to be buying assets, whether financial or real, as a result.
Quick gripe with this article: it assumes that Amazon’s primary market will always be the US. All of the numbers peg Amazon to our market, GDP, and growth.
But there’s reason to believe Amazon could experience long-term growth in the rest of the world, even if growth in the US reaches equilibrium.
But there’s reason to believe Amazon could experience long-term growth in the rest of the world, even if growth in the US reaches equilibrium.
> This implies that in 2027, Amazon’s annual sales will be just a bit less than 10 percent of GDP.
The author is using 2021 GDP numbers to compare to amzn's projected sales in 2027
The author is using 2021 GDP numbers to compare to amzn's projected sales in 2027
The main reason that the analysis is flawed is that Amazon just funnels their profits into R&D which hides it in plain sight. Last year they spend 45 bn USD on R&D which is 10% of their total revenue and double their profit.
It’s not hiding profit, it’s reinvesting in growth… Amazon is saying to investors that they think they can give investors a better return on cash by reinvesting it into Amazon than distributing it to investors to put to work elsewhere.
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Great analysis. Now do tgexsame for the other FAANGs.
If Amazon doesn't fix their horribly astroturfed review system, they will be worthless in a few years after enough people get burned.
What do you think is easier, for Amazon to fix their ratings system or for a competitor to implement the worlds most sophisticated vertically integrated logistics operation? If customer really start caring, they will fix it.
The ratings thing is a blip for them. Only sophisticated customers are aware of it... and sophisticated customers are the exception, not the rule.
The ratings thing is a blip for them. Only sophisticated customers are aware of it... and sophisticated customers are the exception, not the rule.
> Only sophisticated customers are aware of it.
It doesn't take an extraordinary amount of "sophistication" to notice that the products that you ordered are cheap, broken and/or counterfeit trash when they arrive. They don't deliver any more quickly than anyone else anymore either. Unless you're on Prime; I think they prioritize Prime.
It doesn't take an extraordinary amount of "sophistication" to notice that the products that you ordered are cheap, broken and/or counterfeit trash when they arrive. They don't deliver any more quickly than anyone else anymore either. Unless you're on Prime; I think they prioritize Prime.
> notice that the products that you ordered are cheap, broken and/or counterfeit trash
My experience with the products I've received ordering from Amazon has generally been very good, comparable to products I bought in person. Things are generally as advertised, and work correctly. My guess is that Amazon is doing well because mostly people have an experience similar to mine, and are happy to keep ordering?
My experience with the products I've received ordering from Amazon has generally been very good, comparable to products I bought in person. Things are generally as advertised, and work correctly. My guess is that Amazon is doing well because mostly people have an experience similar to mine, and are happy to keep ordering?
I have the same experience.
And, yet, I order from Amazon all the time and I don't see this that I'm aware. I do wonder how my behaviors are different from those who claim ordering from Amazon is a total crapshoot.
Grocery stores, Walmart, Target, etc have an equally sophisticated logistics system. After getting one counterfeit product from Amazon I shifted all of my purchases of kids products (diapers, lotion, sunscreen, etc) to brick and mortar retail.
Me, too. Locally you get to inspect the product, which eliminates most Amazon-class difficulties, and also there's somebody who has to physically hide from you if you have a complaint.
Target and Walmart are the most likely. They just have to work on their search and recommendation engines.
Have to agree, not just this but multiple versions of every imaginable product - most of which is complete junk. Many times I have just given up and gone elsewhere.
I thought they made a smart move with their own branded stuff but a lot of this is just as bad quality.
I thought they made a smart move with their own branded stuff but a lot of this is just as bad quality.
I’ve generally found Basics products to be in the solid B+ (at worst) to A- (typically) level of quality. It’s not going to be junk in my experience.
Amazon have multiple own-brands besides the Basics range though.
I've found them to range from unusable, to adequate, to simple and perfectly designed for purpose (and readily available from dozens of Chinese manufacturers through other channels.)
So many Amazon reviews are clearly purchased and they purchase the reviews by putting cards in the packages with their products.
I wish that was true, but Amazon is huge and ubiquitous, and even if everybody aware of this issue decides on a hard boycott, that still leaves the majority of the world's population.
There is much more wrong with Amazon, but they survive and thrive simply because of their scale.
There is much more wrong with Amazon, but they survive and thrive simply because of their scale.
Agreed at their scale the number of customer churn that falls into the acceptable category is colossal.
I think that ship sailed. don't know a single person who is happy with amazon. only thing missing is a substitute
I am generally happy with Amazon. Most times I can get something from Amazon tomorrow or the next day for a competitive price. I’d say that 97% of my orders are delivered on-time and to-spec. When they’re not, it’s almost never been a hassle to get it fixed.
I had one order last year where I was unhappy with Amazon’s treatment on the issue. They were willing to give my money back without hassle, but that wouldn’t fix my wife’s car’s charging system, so I had to make something work.
I had one order last year where I was unhappy with Amazon’s treatment on the issue. They were willing to give my money back without hassle, but that wouldn’t fix my wife’s car’s charging system, so I had to make something work.
amazon is one of the most rusted institutions in America. 70% of americans view it favorably. https://drive.google.com/file/d/1OgPzcB75uxXiFmTjUUb-ITIr7BF...
Amusing typo inverts the meaning (rusted vs trusted).