The Amazon Plunge

Amazon's report last night sent the stock into a 10%+ tailspin in aftermarket trading, and it hit a low of $172 today.

However, a lot of that seems pegged to the fact that they put in a lot of dough in operating expenses (warehouses, workers, etc.) to meet and grow their $17 billion in sales. Also note that earnings per share outperformed analysts expectations.

The stock has already rebounded to $178 in the afternoon.


Even the "low" projected pricing for later this year puts the stock at $190. Over-exuberant predictions peg them at $270, but I find that unlikely.

Either way, I jumped in for 70 shares at $178. Even if it rebounds to only $200 in the next quarter, it's still a nice profit.


EDIT: And I hope I'm not the only one who appreciates the double entendre in the my thread title.

I check back on Amazon constantly but I just can't get down with a P/E ratio of 130. If someone could justify this for me then I'd take another look but I'm just not seeing it. That is a huge premium to pay for earnings that just aren't there yet and wouldn't be for a long time if ever.

My sentiments exactly. I've seen too many stocks that trade at high P/E multiples fall from grace.

I tend to follow Peter Lynch's principle that the combination of dividends and growth should equal or exceed the P/E ratio. Amazon would have to have an annual growth rate of 130 percent to meet that criteria. Just not going to happen.

Hmm, that's a decent rule of thumb. I'll have to try it out a few times in my head to see if it holds up.

Oh, it holds up alright. Google Peter Lynch and Fidelity Magellan fund.

The con is that it is sometimes rather difficult to find securities that meet this qualification. When you do locate stocks of quality companies that meet the criteria, they are usually undervalued relative to their peers. The advantage is that if you follow this rule, it will keep you out of bull markets. It kept Peter from participating in the tech bubble of the late 90's. Of course, one of his other rules is not to ever buy the hottest stock in the hottest industry.

That alone is going to kill a lot of returns. I don't agree at all with staying out of bull markets, as that's where good returns are made. 25-40% returns (historically) in a bull market will offset a lot of losses from bear markets. There's no reason to jump out just because you think prices are getting too high. But you have to learn to spot the difference between a bull market and a bubble that's about to burst. When a price gets too good to be true, start looking to see why.

As for Amazon, I agree with others. They're a good company, but their not growing fast enough to justify their high price. If they were growing much quicker, I would be interested.

It is impossible for anyone to time the market. Those kind of returns are only made if your recognize a bull market when it occurs and sell your position. Human psychology prevents that from happening more often than not. Most folks stay in the market as they see their investments climbing higher and higher. Even worse, lots of folks buy at the peak thinking it will only continue to go up

When I said it will keep you out of a bull market, I meant it will keep you from buying during a bull market. Lynch has done very well by tracking historical P?E values. If a company doesn't have the growth necessary to justify high values, he will sell. For slow growers like Coke, his rule of thumb is to sell after a 20% appreciation in price. No one can argue against Lynch's track record.

I agree with everything above for long term investments.

I only got involved with AMZN with a short term (1-3 month) time line. I don't have the stomach to sit on an overvalued stock for over a year, but based on their price trend I firmly believe they could breach $200 this quarter.


I traditionally have a "bail out" point of 10% gains. If AMZN even kisses the high $190s, I will likely bail.


My folly with this method was USG. I put in about $10,000 when they were around $6 and bailed at $7. Motherfucker just hit $14.

The short term is a good plan when dealing with high P/E ratios.

I also think its wise to recognize that when a P/E ratio that high is involved rationality isnt in the forefront of investors minds (unless they are insiders), so its not like you should kick yourself for not knowing a huge jump in price was coming when the stock is already (arguably) overbought.

That's not always the case, although sometimes it is. You have to remember that P/E is generally looking backwards. If earnings increase significantly, then the P/E for the upcoming quarter/year could be much lower. I don't know why more people don't look at the forward P/E using expected earnings, as that's really a better indicator of how the stock is priced relative to their future earnings.

Amazon probably isn't a great example because they're not growing as fast as they should be. But their current P/E (looking backward) is about 136. If you look at the P/E for the next 12 months of expected earnings, it's only 125. Further, if you look at the P/E for 2013, it's only 63 at the current price. So it's entirely possible (although I agree, unlikely) that Amazon is priced reasonably if they exceed their expected earnings targets. Again, the faster a company is growing, the more applicable a forward looking P/E is. Even using the most optimistic numbers, Amazon would still have a high P/E in 2013 if their share price stayed constant. They need to greatly exceed earnings estimates to bring down that number in the future.

Who the heck ever thought they were worth 100 times earnings?

I have been using them as an example of a stock NOT to buy when speaking to people about their 401k plan at work and relating mutual funds versus individual stock ownership.

Maybe speculators could make some bucks off it, but no one who wants to hold it for longer term investment will.

ETA: Holy crap, they are at 136 times earnings?

Let me get this straight - people think that company is worth the earnings of the next how many years? What are their projections again?

So if I had 85 billion (market cap of AMZN) I should buy Amazon, with my new $632MM of earnings annually instead of a (almost) risk free 1.7 Billion on a 10 year treasury?

I don't think a 10 year treasury is anywhere near risk free. If you do, you're whistling in the graveyard.

I personally wouldn't invest in Amazon or the Treasury

This is why I think they stand a high chance of being "Netflixed" and a lot of folks lose a lot of money very quickly.

amazon is making about 6% or so profit... and about to be forced to start collection sales tax in alot of states... at 5-7%... what do you think that will do to there bottom line?

Ummmm.... probably nothing... Sales taxes are passed on to the customer. Businesses don't pay sales taxes out of their profit margins.

The only effect it might have, is slightly decreased sales in states that they're collecting the tax in. They already collect KY sales tax, and have continued to operate a fulfillment center out of KY, so I'm guessing the effect it has on sales is minimal. Otherwise, they've had a lot of opportunity to move their fulfillment center to one of the states that gave them a free pass on sales tax.

Even if the worse case scenerio happens, they only operate distribution centers in 12 states (including their currently planned expansions), so that would leave 38 states with a tax-free customer base. I don't see the sales tax issue making a major impact in their growth or earnings.

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