Investors Should Stand in Awe of Amazon, Facebook
You (not you!, but you in general) have a view of how things ought to be.
In Amazon.com's (AMZN) case, maybe you suffer from 1999-2000 related post-traumatic stress. When you look at a P/E ratio of 3,247, you can't think anything but conventional thoughts. Your head will not wrap around a bull case that includes a lofty valuation, thin margins and weak -- sometimes non-existent and certainly not consistent -- profits. There's no changing your mind; the situation simply should not exist and, over time, it's not possible for it to persist.
When challenged, a refusal to consider information contrary to your worldview kicks in. That leads to comfortable comparisons. Like the one a guy made on Twitter @Rocco_TheStreet : Point to one other company that has continued to rise in value without EPS growth AT SOME POINT.
Generalizations like that make intuitive sense. They sound good at first glance. But, as is inherent with a generalization, it ignores situational nuance. Often, this doesn't matter. However, in the most dynamic and specific cases, generalization portends ignorance. You (again, not you!) adhere to the comfortable view, rely on that lens to see the world and miss crucial points, such as why AMZN deserves a hyper-multiple and why Facebook (FB) will follow in its footsteps.
Pull one theme from Facebook's post- earnings release movement (the stock dropped and recovered very much like AMZN does) and Q4 conference call: Investors have confidence in Facebook management (there might not be a better team than Mark Zuckerberg and Sheryl Sandberg) and its ability to seize the company's massive long-term opportunity.
If Amazon is in the seventh-inning stretch (of a game that's certain to go into extra innings) vis-a-vis e-commerce dominance, Facebook is batting around the order in the top of the second. Think of Facebook as where Amazon was in early 2002. To understand -- conceptually, theoretically and practically -- why you need to treat these types of companies (and there are not many of them) differently, it's best to focus on Amazon.
All I can chalk the persistent bearishness and repeated references to valuation-related bubbles up to is a lack of appreciation for Amazon's enormous opportunity. Skeptics just do not appreciate the magnitude; in fact, many lack basic understanding of it.
As I did in the article linked earlier, I often return to a 1999 Jeff Bezos interview where the Amazon CEO expressed, in so many words, his willingness to sacrifice short-term metrics in pursuit of long-term opportunity. As long as that opportunity exists, Amazon will spend aggressively. That's essentially what Facebook executives said Wednesday, telling the crowd that as they further ramp up the business in 2013, profits take a back seat to growth.