Amazon's P/E ratio is 4000
Party like it's 1999
On a blog called Great Ponzi, it would be irresponsible for me to not mention Amazon - AMZN, which in the last 7 years has increased at an annualized rate of 45%. It's also gone ballistic in 2015, increasing 112% in just one year. The current market cap is $315 billion, making it as large as Exxon Mobil and almost as large as Berkshire Hathaway.
Those are some huge gains and high valuation, but that's not what makes a stock an over-valued bubble. High valuations are justified if:
- a company has strong income growth, or
- it can be expected to have much higher incomes in the future
The problem, however, is that Amazon has been around for a long time. Yet, it does not show a promising pattern of income growth as other tech stocks do. Its net income is stagnant at best, declining at worst. In my opinion, AMZN is ridiculously overvalued and will eventually crash, unless there is a big increase in earnings.
The first thing you will notice from the above plot is that Amazon's incomes are all over the place, with huge variation. There is no trend in earnings. The second thing you will notice is that, if anything, average income is trending lower.
What is Amazon's P/E ratio?
The highly varied quarterly incomes make it difficult to grasp the P/E ratio. What's critical to us is the forward P/E since we're trying to grasp current valuation in context of future earnings. Stock investment looks ahead. So, let's look ahead.
One estimate of average quarterly earnings is $103 million, across the full time span. However, I believe a more accurate projection comes from 2012-2015.
Based on the average of the last four years, I project quarterly earnings of $18 million, or $71 million annual earnings. This gives AMZN a forward P/E of 4441. Let's call it a forward P/E of 4000 (four thousand).
But don't tech stocks all have high PEs?
There are a couple responses to this criticism of high Amazon P/E and poor net income. One is that Amazon reinvests in itself and therefore directs cashflow towards expansion rather than net profit. The other response (which means more or less the same thing) is that it's normal for tech stocks in growth phases to have very high P/E ratios.
I agree that high P/E ratios are normal during expansion and growth phases. However, the expansion and growth is ultimately towards the end goal of producing lots of net income. And while P/E ratios are high, it's also normal -- and expected -- that the company demonstrates a promising trend in its earnings.
Let's compare to Facebook which also has a high P/E of around 100. The data comes from Statista.
Notice the difference versus Amazon. Both companies have high P/E ratios and choose to heavily invest in themselves instead of just producing net income. However,
- AMZN earning history is flat-to-down, whereas FB history is upward
- The history of AMZN gives no reason to believe their net income will rise,
- Whereas history of FB gives good reason to expect higher earnings ahead
That's the critical problem with Amazon. It has incredibly high valuation, with a forward P/E ratio of 4000, while not showing any promise of strong net income on the horizon. Its earnings profile is very poor compared to other highly-valued tech companies, which at least show strong uptrends of earnings.
I don't advocate short selling AMZN. You can't fight strong momentum like this and it's impossible to know when the irrationality will end.