Amazon is Sky High

By Jon Quast - August 17, 2012 | Tickers: AMZN, CMG, LNKD | 0 Comments

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Paypal founder Elon Musk has a new pet project these days.  It seems that making money on planet earth isn’t as exciting as it once was.  He now has his sights set much higher: outer space.  His new business is called SpaceX.  Perhaps you have heard of it.  It made news earlier this year as it was the first private sector space company to deliver a payload to the International Space Station, a truly remarkable achievement.  I was once a person very critical of the budget cuts made to NASA, but now see that it has opened the door to the private sector which will lead to competition and should ultimately lead to a new great age of space exploration.

Musk isn’t the only CEO trying to reach the heavens.  Amazon’s (NASDAQ: AMZN) CEO Jeff Bezos has a side project of his own called Blue Origin, also set on outer space.  But where SpaceX is delivering payloads, Blue Origin has only managed to crash their prototype vehicle.  It’s just a setback;  I’m sure they’ll get better.

To find something truly astronomical, Bezos need look no further than Amazon’s P/E ratio.  As of this writing, the P/E ratio is sitting at 284.  (That’s high)

Who Cares?

When we talk about P/E ratios we are analyzing how fairly valued the company is, and how fast the company is growing.  A high P/E ratio is sometimes fine when the company is growing fast enough to justify it.  Chipotle Mexican Grill (NYSE: CMG) was considered to have a high P/E ratio when they were trading with it at 70ish.  The market was ok with that for a while.  The company is a very fast growing one.  The most recent quarterly results however showed slowing growth (although still double digit), and the stock price took a hit.  Now Chipotle has a more modest P/E in the 30s.

LinkedIn (NYSE: LNKD) also has a very high one themselves.  At just south of 900 they are one of the priciest out there.   While that is too rich for my blood, the counter-argument is that LinkedIn is growing income by over 100%.  That kind of growth is hard to argue with.

So maybe we should ask: “how fast is Amazon growing?”  It’s a good question.  I was reading Amazon’s quarterly statement, and admittedly it’s one of the more complicated ones I have read to date.  As I went over it again and again, the things that stood out as good news to me were that a lot of money was spent on acquisitions such as Kiva Systems in May, and net sales were up 29%.

What’s the bad news?  Amazon was hammered with taxes.  According to the report, some capital losses weren’t recognized causing them not to get the deduction.  They wound up paying over the 35% thresh-hold.  For that and some other reasons, net income was $0.01 per share.  That is disastrous.  Free cash flow was also down 40%.  It seems as though profits at Amazon aren't growing fast at all.  In fact, they aren't growing at all.

Nobody Cares

It seems that Amazon has historically barely been profitable.  Their goal has always been to have a high volume of sales, with a very small margin, to in the end turn a profit.  Eventually by keeping sales high, and by acquiring new avenues to grow business as well, investors feel like it will finally payout in the way of higher profits.  Up until now with Amazon, it hasn’t.

However, no one seems to really care.  People ran for the hills when Chipotle showed the ever so slightest sign of slowing.  There P/E was only a quarter of Amazon's.  Amazon investors seem to be largely ignoring the high valuation and small profits.  Maybe they know something I don’t.

For Me

Amazon’s stock price does not match its income.  I am not comfortable with its valuation and wouldn’t think investing in them would be a good idea.  But if SpaceX would go public, maybe they would be the ones who could give me out of this world returns.

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