I ran some numbers on Amazon today. I have been wanting to add some more well known companies like this to the list above. In part this is because I would enjoy learning more about the business fundamentals of additional companies. Also I could hopefully identify some additional good investments.
In the case of Amazon it’s clear that it is far from being any kind of value stock. It has a price earnings ratio of 142. It trades at 12 times book value. It is profitable but the ROE is only about 9%. It’s sales have been increasing rapidly, with sales per share growth averaging 31% per year in the past four years. Earnings per share however have only grown at an average of 5% annually in the past four years. Even if analyst earnings growth projections for 2012 and 2013 are accurate, it trades at some 72 times 2013 earnings.
Basically the current share price is already pricing in quite a few years of very strong growth. If growth were to falter from the current lofty expectations then the share price could drop rapidly.
The stock compensation seems too high.
Possibly the earnings should be adjusted upwards to remove some amortization of intangible assets. But I could not see any obvious disclosure of this in the annual report on Form 10-K.
If I were to complete the analysis it would be rated Sell. I do not particularly see much value in adding this company to the list as I suspect very few subscribers would own it. Given its sales growth it is certainly possible that the share price will not drop and may even continue to rise. But I don’t see the support for that in its numbers.
Generally I like to find bargains “hiding in plain view”. If Amazon is a bargain, it is a well hidden bargain.
I have updated my article that examines whether stocks are really riskier than bonds. This article updates a graphical analysis that I first did back in 2001 when I first obtained the necessary data. At that time, based on holding investments for 30-years stocks were always the clear winner at the end of a 30-year holding period. However we have now had a decade where stocks have performed relatively badly and long-term bonds have had strong returns due to declining interest rates.
In fact an investment strategy of holding only 20-year U.S. government bonds started in 1982 and pursued for the 30 years ended 2011 has provided a return of 7.83% compounded annually and has beaten out stocks at 7.78%.
As a result, based purely on historical data it is no longer as clear that we should expect stocks to beat bonds. And certainly a partly balanced portfolio of say 70% stocks and 30% bonds has been a very good choice in recent decades.
Nevertheless when we consider that the reason that long-term bonds did so well was due to the dramatic drop in long-term interest rates, and that long-term interest rates are at historic lows and have little room to fall, then we can logically conclude that a portfolio of stocks can be expected with a high degree of certainty to outperform long-term bonds over the next 30 years.
However, for shorter investment horizons (such as 10 to 15 years) some allocation to bonds is likely appropriate. For very short time horizons such as within one year a high allocation to cash would be appropriate. (Don’t invest money that you really need for next month’s groceries money in stocks)