Clearly, traditional retailers can’t keep up with Amazon’s on-line
convenience, low costs, and fast delivery and are running up the white
flag. It’s akin to what happened to the big booksellers when Amazon first
came on the scene, only on a much larger scale.
The announcement plays right into the hands of President Trump, who has
made job-creation his number-one priority. His team was quick to take some
credit, saying he “was pleased to have played a role in that decision by
Amazon.” It’s not clear just what role Trump actually played, but U.S.
corporations are quickly learning that it’s prudent to stay on the right
side of the mercurial President.
In making the announcement, Amazon said it will increase its staff by 55%,
to 280,000 by mid-2018. “These jobs are not just in our Seattle
headquarters or in Silicon Valley – they’re in our customer service
network, fulfillment centers, and other facilities in local communities
throughout the country,” said Jeff Bezos, Amazon founder and CEO.
The company said that the new jobs won’t be only entry-level positions but
will involve hiring people with all types of experience, education, and
skill levels, ranging from engineers and software developers to those
seeking on-the-job training. Amazon’s core business is retailing, but the
company is involved in a wide range of other ventures, including cloud
storage, streaming video, on-line music, and its revolutionary new voice
control system, called Alexa.
Whether or not Trump was in some way involved in encouraging Amazon to
create the 100,000 jobs (doubtful), it was a big boost for his core
objective, especially in the wake of the Sears and Macy’s announcements.
It’s also a huge vote of confidence in the company’s future and raises the
question of just how big Amazon is going to get and whether it’s worth
investing in the stock at this stage.
On the surface, the metrics are very unattractive. Amazon shares closed on
April 7 at $894.88 (figures in U.S. dollars). It has a trailing 12-month
price/earnings ratio of 182.69. The fourth-quarter profit margin was a tiny
1.72%. This is a company that needs to keep generating massive sales growth
to justify its sky-high share price.
So how is it doing in that regard? Very well, actually. Sales in the fourth
quarter (to Dec. 31) were $43.7 billion, up 22% from $44.68 billion in the
fourth quarter of 2015. For the full fiscal year, the company reported
sales of $136 billion, up 27% from the $107 billion of sales in 2015.
Those numbers are impressive but they don’t translate into a fat bottom
line. Fourth-quarter earnings were $749 million ($1.54 a share, fully
diluted). For the year, Amazon’s final 2016 earnings were $2.4 billion
($4.90 a share), which gives Amazon a trailing p/e ratio of 182.63 based on
the current price. The consensus estimate for 2017 is $7.11 per share,
which puts the forward p/e at 125.86.
By comparison, Facebook has a trailing p/e of just under 50,
Alphabet Inc. (NASDAQ: GOOG)
is at slightly below 30, and
Apple Inc. (NASDAQ: AAPL)
is at about 17. Among the big high-tech giants, only
Netflix Inc. (NASDAQ: NFLX)
is more expensive, with a p/e of 340. Amazon would have to earn about $25
per share, or about three and half times times its projected 2017 profit,
to get its p/e into the same range as Alphabet, and that’s assuming no
increase in the share price.
So does that mean don’t buy? Anyone who made that call in the past turned
out to be dead wrong. Five years ago, you could have bought shares for less
than $200. There have been bumps along the way, but the trend line is
steadily upwards, and the stock is trading above both its 50-day and
200-day moving averages.
Amazon is a long way from being the world’s largest retailer, trailing
companies like Walmart, Costco, and Walgreens Boots by a large margin. But
it’s growing faster than any of the others, and I wouldn’t bet against it
gaining the number-one spot at some point in the next decade.
So despite the ridiculously high p/e, I’ve added Amazon to my recommended
list, but only for buyers who clearly understand the stock is expensive at
this level. I happen to believe it will be even more pricy a year from now.
Certainly, after the job creation announcement, the company should be on
Donald Trump’s most-favored list, even though Jeff Bezos owns the
anti-Trump newspaper, The Washington Post.
Ask your financial advisor if this stock is suitable for you. I do not
recommend it for conservative, low-risk investors.
is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investor newsletter, which are available through the Building Wealth website.
For more information on subscriptions to Gordon Pape’s newsletters,
check the Building Wealth website.
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© 2017 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
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