By conventional measures of stock prices, Amazon.com Inc looks very expensive. It’s actually surprisingly cheap.
Twenty-one years after it went public, a share of Amazon stock costs 70 times more than the company’s estimated per-share future earnings. That means investors are willing to pay much more for each dollar of Amazon’s earnings than for shares of Microsoft, Apple, Facebook, Alphabet or Alibaba. The everything store’s price-to-earnings ratio is four times higher than that of the S&P 500 index.
Yet even at this valuation, all but 1 of 52 analysts surveyed by Bloomberg recommend owning the stock, and 48 of them say that investors should buy it and keep it, according to data compiled by Bloomberg. Which makes Amazon something few analysts ever believed it could become: a value stock, fetching a modest price considering the company’s opportunities for growth.
To understand why Amazon remains a bargain means acknowledging the commitment to create efficiency for consumers by spending more money on more works in progress than anyone. Amazon’s market capitalisation just became greater than the combined worth of the leading companies in six different industries where it is a competitor.
The prospectus from the initial sale of Amazon stock on May 14, 1997 said the online bookseller might never make money, and that its operating costs were greater than rivals Barnes & Noble Inc. and Borders Group Inc. Within a month, Amazon was down 19 percent. The company’s gross margin (revenue after the cost of goods sold) of 22 cents on the dollar was dwarfed by Barnes & Noble’s 36 cents and less than Borders’ 27 cents. While first-quarter sales surged to $16 million from $875,000 a year earlier, losses widened to $3 million from $331,000.
The strategy of relentlessly innovating by reducing customer costs and increasing convenience at the expense of quarterly earnings helps explain why Amazon shares beat the world and gained 498 percent during the past five years as the top performer among the 15 companies in the Bloomberg Intelligence Global E-Commerce Index. The also-ran S&P Consumer Discretionary index and S&P 500 advanced 107 percent and 87 percent. It took less than a year for Amazon’s market capitalisation of less than $500 million to exceed the $2.6 billion of No. 1 Barnes & Noble. By 2015, Amazon was worth more than $220 billion, exceeding the value of Walmart Inc., even though the world’s largest retailer had $505 billion in total revenues, more than double Amazon’s $193 billion at that point.
In the business of leasing information-technology gear, by contrast, Amazon didn’t need to play catch-up. Despite strong growth over the past decade, cloud computing business represents less than 10 percent of total information-technology spending, which shows that the cloud has a lot more room to grow in the coming years.
Amazon also is competing in video streaming with Netflix Inc, whose market capitalisation still is about a fifth of Amazon’s after growing 10 times during past five years.
Amazon is now worth more about as much as the combined $831 billion market capitalisation of six competitors, Barnes & Noble, Walmart, IBM, Oracle, Netflix and UPS. It invests huge sums on technology and content spending for future pro-duct development, $25 bill- ion during past 12 months.
Matthew A. Winkler is a Bloomberg Opinion columnist. He is the editor-in-chief emeritus of Bloomberg News