Many value investors have been sitting on the sidelines watching Amazon’s [stckqut]AMZN[/stckqut] stock continue to rise. They remain on the sidelines because they perceive Amazon as significantly overvalued in terms of P/E ratio, which factors in earnings. These value investors perceive Amazon’s stock as irrationally inflated. However, the reality is that Amazon has been expanding significantly over the years, sacrificing profits for a wide-scale distribution network. This has kept earnings suppressed, thus inflating the P/E ratio which the value investors cite as the evidence for overvaluation. While these value investors may see Amazon investors as drunk at the punchbowl, I think they are actually quite sober.
Amazon’s stock price increased at a rate that exceeded the rate of revenue growth over the past 10 years. While revenue increased about 819% over the past 10 years based on 2007 revenue of $14.8 billion and 2016 revenue of $136 billion, the stock increased by over 2,000% from $38 to $845.
I’m not expecting the pace of the stock growth to exceed the pace of revenue growth going forward. The reason for this is due to Amazon’s expanded P/E multiple. Amazon’s trailing 12-month P/E multiple was below 100 at about 86 in 2007. The current trailing P/E multiple is 172. With a much higher P/E multiple, I expect Amazon’s stock to grow below the pace of revenue growth, but still at an above average rate.