Latest Trade Alerts

Brokerage Partners

Amazon.com: When Short-Term Profits Don't Matter

Written by: Rocco Pendola 04/19/12 - 11:47 AM EDT
Tickers in this article: AMZN
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- Amazon.com(AMZN) has a price-to-earnings ratio of about 140.

For gaggles of investors, such a high P/E is reason enough to sell or short the stock.

In fact, loads of investors appear to invest almost solely on the basis of P/E ratios and other quantitative metrics that measure "valuation."

More Headlines

That's why you see so many people running around calling Research In Motion(RIMM) and Radio Shack(RSH) "value plays" as each stock races to the bottom.

Meanwhile, loads of investors yowl about lofty "valuations" as they call stocks like Lululemon(LULU) and Chipotle Mexican Grill(CMG) shorts all the way to the top.

Amazon.com gets the same rap as Lululemeon and Chipotle Mexican Grill.

I don't usually subscribe to "you're either with us or against us" dichotomies. The world is too complex for that. But when looking Amazon, it's useful to place people into two camps, although some people fit into both camps.

  • Camp One: People who make decisions based on the here and now, and on the hard data that sit in front of them. It's black and white: AMZN has a P/E of 140, so the stock is overvalued and it must one day crash to a more reasonable valuation. Nothing you say can change these people's minds.
  • Camp Two: People who can take into account the present yet discount it to consider a longer-term, bigger-picture perspective. Sure, AMZN has a P/E of 140 and a somewhat deteriorating bottom line, but why? Is Jeff Bezos so stupid that he's running this thing into ground? Or is there something bigger and more meaningful at play here?

To truly appreciate Amazon.com and be able to rap your head around its "valuation," you need to either be a member of Camp Two or at least be willing to make the attempt to think like Camp Two thinkers.