A Techie’s Guide to the Future of Tech Stocks: Amazon

See my Apple coverage here. This article is also available at The Motley Fool.

There are very few companies that are as universally loved as Amazon (NASDAQ: AMZN) by both consumers and investors. The consumer love is much deserved – getting amongst the best, if not the best prices on everything you can think of and combined with great customer service. Adding Amazon Prime to that and getting free two day shipping, online streaming and more for only $80/year is a steal especially if you buy lots of stuff from Amazon.

And here is a chart that shows what I mean by Investor love:

Can you imagine any other company that has razor thin margins with almost no profits have a consistently high P/E. Currently, the TTM P/E is over 3000. The Forward P/E looks better at about 150, but Amazon is known to make huge investments in hopes of future payouts. How long can this go on?

As Amazon’s net income fails to impress can the stock keep on rising? Personally I wouldn’t take the risk. Maybe the current investors only look at revenue?

So it can be seen that the stock price rise sort of moves in tandem with revenue. I’m always more concerned with net income than just revenue. Price/Sales may be a good metric for startups, but Amazon is far from that. Amazon’s TTM revenue was $57 billion. That pales in comparison to Wal-Mart’s (NYSE: WMT) $464 billion, but at the decent growth rate puts Amazon within spitting distance of Target’s (NYSE: TGT) $72 billion. But both Wal-Mart and Target have better margins than Amazon.

Even though Amazon has technology offerings like cloud services, I primarily consider them to be a retail company and even though they directly compete with Google, Apple, Microsoft and other device manufacturers, Amazon’s primary goal is to move products. And Amazon is very good at it – so good that they are responsible for the death of the bookstore and eventually the electronics store.

In spite of the serious revenue growth, I feel the high P/E is unjustified. What would be a reasonable P/E for a company like Amazon which sits between the high tech and the retail segments? Something in between high-tech and retail? Or is there something special about Amazon? Will they have a massive boost in profits once they reach a certain size? It hasn’t happened yet and I’m not betting on it.

Let’s say for argument’s sake that Amazon deserves a forward P/E twice that of Wal-Mart. That would put Amazon’s price under $50/share. So what is propping Amazon up to 11x the P/E of Wal-Mart? One explanation is that Amazon’s 5 year revenue growth is 10 times that of Wal-Mart. Unfortunately, earnings is a different story. Maybe when Amazon gets to the scale of Wal-Mart, the earnings will catch up. Just maybe.

For now, this is one tech stock where I’m staying on the sidelines.

Disclosure: Own GOOG, AAPL, TGT

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