By: Jeff Pollock
June 2, 2017

Amazon briefly traded at $1,000 per share last week, marking a new all-time high for the stock.

Ideal investments are found when the attributes of a great company as well as a good stock valuation align. Believe me, they’re not easy to find. We turn over many rocks here at Vestcap before finding one that matches both criteria. Our process is to study the financials of a new company each week, derive an intrinsic value that we believe the shares are worth, and then invest only if the stock trades below the figure we feel it’s worth.

Great companies are easy to spot. They generally have a strong track record of sales and profit appreciation, command high margins, carry minimal debt, and generate significant amounts of cash flow. Good stocks aren’t quite so easy to find. An appropriate valuation is subjective to its observer, but looking at its metrics relative to its peers or its own historical past is a good place to start. Beyond the valuation, a history of returning capital to shareholders is an important feature for us.

While Amazon is a great company, it’s far from a good stock.

Though starting out as a mere online bookstore, Amazon has now grown to become the world’s largest Internet retailer. By sheer market capitalization, it’s now almost twice the size of brick-and-mortar retailer, Wal-Mart. Over the past 15 years, Amazon has successfully appreciated its revenue by no less than 20% annually. Today, it’s the top-of-mind destination for any consumer looking to make an online purchase.

The stock’s valuation, however, is far less appealing. The market is paying $150 for every $1 that the company earns on a per share basis. By comparison, the market is paying about $17 for every $1 earned per share by Wal-Mart. While Amazon investors would argue that its company offers a significantly stronger growth profile than Wal-Mart – which it does – it’s expensive at $1,000 per share even based on earnings expectations for year 2020. Using today’s $1,000 share price, investors are paying $37 for every $1 in 2020 earnings.

Though Amazon has impressively grown to become the world’s largest online retailer, the company’s stock valuation is far from a bargain for investors. With countless examples from the past of great companies that unfortunately carried a bad stock valuation, shareholders of Amazon may want to recall Warren Buffett’s advice to “be fearful when others are greedy and greedy when others are fearful.”

Clients of Vestcap and this writer are neither shareholders of Amazon or Wal-Mart.

 

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