Here’s Why Amazon Is Cheaper than You Think

Amazon share price overvalued

The short sellers are breathing a sigh of relief.

For the longest time, there’s been a group of sceptical investors shorting Tesla, Inc. [NASDAQ:TSLA].

Surely a company making no money, always behind on deadlines, run by an unpredictable founder can’t rise 15 times?

Yet this describes Tesla.

From July 2010 to present, Tesla is up more than 1,500%.

In the last three and a bit weeks, however, Tesla’s stock is down close to 20%.

Is this the start of a coming collapse? I actually have no idea.

But it does seem as if short sellers have a new target in their sights. This business at least makes money. But a forward PE of 72 doesn’t exactly scream cheap.

Today, I wanted to tell you why Amazon.com, Inc. [NASDAQ:AMZN] could be cheaper than you think.

Tesla versus Amazon

I probably don’t need to convince you. Comparing Tesla to Amazon is like talking about apples and oranges.

One’s an electric vehicle manufacturer, the other is a tech conglomerate.

There’s something about both stocks short sellers love though: very little earnings to back up their price.

In the second quarter of 2018, Tesla saw sales rise 47% year-on-year (YoY). The cost of selling Teslas alone ate up all of the company’s gross profit and then some.

And in fact, losses have worsened for the company over the last 12 months.

Kind of makes you think why anyone believes this stock is worth close to $300 a share.

Amazon too saw sales rise in the second quarter of 2018, up 39% YoY. Unlike Tesla, Amazon makes money.

The tech conglomerate generated US$2.5 billion in profits for the quarter, up 1,186%!

According to analysts, Amazon could see more than US$13 billion in profits by the end of 2018. Based on this estimate Amazon’s stock trades at 72-times.

Put in other words, investors are paying $72 for each dollar of Amazon’s earnings. That’s an earnings yield (inverse PE) of 1.4%…

Surely this stock is overpriced?

It’s why Amazon is now the most shorted stock in the US.

Reported by Reuters:

With Tesla’s shares briefly dipping below the $US300 level on Thursday, the electric car maker ceded its seat as the most shorted US stock to Amazon, according to data from financial technology and analytics firm S3 Partners.

‘…Amazon shares rose above $US2000 for the first time on Thursday and the company is just shy of a $US1 trillion market capitalisation.

‘…Apple, Alphabet, Netflix, Microsoft and Facebook are some other top shorted US stocks, as some investors have bet the high-flying technology names are due for a pullback.

But before you go jump in with the short sellers, consider these few words from investing legends.

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Is Amazon overvalued?

It never hurts to quote one of the most successful investors ever.

At a Berkshire annual general meeting, Warren Buffett said Amazon was nothing short of a miracle.

The truth is that I’ve watched Amazon from the start and I think what Jeff Bezos has done is something close to a miracle, and the problem is if I think something is going to be a miracle I tend not to bet on it.

And while Warren thinks Amazon is truly amazing, he thinks even more highly of its founder, Jeff Bezos.

When talking to CNBC, Warren said:

I’ve never seen a guy succeed in two businesses almost simultaneously that are really quite divergent in terms of customers and all the operations.

‘…I can’t think of another example like it.

Jeff is the most remarkable business person of our age.’

But Warren isn’t buying the stock. It must be because he thinks it’s overvalued? Maybe.

But while Warren thinks the stock is a little high, there is another investing legend buying as much Amazon stock as he can get his hands on.

The addressable market for what they’re (Amazon) doing is just gigantic,’ Bill Miller told CNBC.

Miller, like Buffett, is a value guy.

He’s been managing money since the 1980s. According to The Washington Post, had you invested $1,000 with Miller in 1993, you’d have $6,000 over the next decade.

It’s twice what you would have got had you bought ‘the market’ over the same time.

In fact, Millers record was so great for so long, a book was written about it: The Man Who Beats the S&P.

And he is going full throttle on Amazon.

As of last year, Miller had poured US$1.34 billion into Amazon.

That means he was likely buying the stock when it traded for much higher than 72-times earnings. But why would Miller buy Amazon for such a price?

Consider the data store and the cloud. The global cloud industry is growing fast at 17.6% and could reach $555 billion by 2020.

Amazon’s AWS cloud sales are growing at 49% YoY. That means Amazon is not only keeping up with the cloud market as it expands. It’s taking more and more market share each year as the industry grows.

It’s the same deal for e-commerce as well.

Global e-commerce is a trillion dollar market growing by about 7% annually. Amazon’s most recent online sales YoY grew by more than 14%.

And that doesn’t include third party sales, which grew 39% YoY.

So not only is Amazon growing with these massive industries. They’re dominating.

It’s why Miller likes to refer to Amazon’s addressable market. If their everything store can continue to dominate what could be trillion dollar markets, surely a market cap of US$944 billion isn’t all that high.

Miller believes one of the most misunderstood things about Amazon is its investment cycle. They do a lot of experiments at Amazon.

In fact, AWS and Amazon’s third party seller business were both experiments.

Then, once they find something they can dominate, spending goes up.

That’s actually a bullish sign because it indicates they now believe they can actually address another market very successfully,’ Miller said.

Maybe I haven’t been able to convince you that Amazon is cheap. But, there’s still a lesson to take away.

Don’t dismiss companies at first glance.

Anyone can look at PE ratios. Anyone can look at profits and financial accounts. If you want to find huge winners you may need to ignore accounting profits and do a bit of detective work.

Sure earnings might be low. But why are they low? Are R&D costs not being capitalised when they should be?

Is spending always a bad thing? It might lower earnings in the short-run, but long-term it could secure hundreds of millions in profits.

Rather than obvious bargains, the market is peppered with stocks that are misunderstood. I believe Amazon falls into the latter category.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: If you’re looking to add a few promising biotech punts to your portfolio, don’t invest a cent until you read our tech expert’s Harje Ronngard free reportThe Key to Spotting Breakout Biotech Stocks‘.

Harje Ronngard

Harje Ronngard

Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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