Amazon.com (AMZN) has been pursuing a rather single-minded and aggressive reinvestment strategy over the last few years, focused mainly on digital content, cloud services, and building more warehouses for quicker shipping of 3rd party inventory.
This has made for a situation that has seen the company’s share price gain over 27 percent during the past year alone, even though income was $39 million in the negative for 2012.
On March 14, JPMorgan Chase (JPM) even downgraded Amazon’s stock to neutral based on concerns of a reduction in gross profit growth in 2013, saying that the company’s third party sales, upon which it plans to rely more heavily beginning this year, will face tougher competition.
Furthermore, the cash that has been consistently funneled into expanding operations and creating the Buffet-ian moat between itself and the competition has led to an operating margin that has been getting thinner for two years running.
But the company’s investors seem to be well aware that Amazon has already been through this cycle of heavy reinvestment at the expense of earnings, followed by a breather as it executes on its investments, at least once in the past, with the outcome always seeming to eventuate in greater shareholder value.
While Bloomberg estimates the company’s price-to-earnings ratio at almost 727 (other outlets show a non-existent P/E, due to Amazon's 2012 net loss), meaning that shares trade at that many times the actual earnings-per-share figure, which would make it the most expensive stock on the S&P 500, the company’s forward P/E ratio for 2013 is just under 80, and is predicted to drop to under 50 next year.
So while the company’s shares may decrease in actual price if, say, J.P. Morgan’s fears are well-founded, or whether they increase if Amazon’s predictions are correct, the company’s stock will either way become less expensive over the next year.
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