Amazing Amazon

From this recent Barron's article:

Somebody needs to explain how's share valuation really works. Because, despite wondering about it for more than a decade, I still can't figure it out. First it was eyeballs. Then it was clicks. Then revenue-per-customer, then wallet-share and now gross margins. Price-earnings-ratios be damned.

I've made more than my fair share of comments about Amazon's (AMZN) baffling valuation.

It is and has been a stock I would not buy at even a fraction of current prices.

No interest whatsoever.

In a prior post, I said that Amazon will probably continue the process of going from very overvalued to even more overvalued.

I said that not because I thought intrinsic business value would be created to justify the higher prices.
(Amazon could, in fact, do that someday...I have no idea.)

It comes more from watching too many securities remain extremely overvalued, for years at a time in enough cases, especially (but not limited to) during late 1990s and into the early 2000s (Back then, it wasn't just tech stocks even if they grabbed most of the headlines). An overvalued stock can stay that way (and get even more so) for an extended period of time.  The forces at work practically guarantees it will happen to certain securities from time to time.*

No bubble required.

So I think it's hardly surprising that Amazon's stock continues to defy economic gravity. Once valuation isn't anchored by annoying things like proven sound fundamentals (not hoped-for-someday-it-will-all-come-to-be fundamentals), it's a simple matter of whether there's a good story and enough short-term "votes" to prop up the shares.

Hope and enough money can keep a stock high that already seems weirdly disconnected from reality (and from the usual laws that govern valuation) for a very long time.

That doesn't mean it is not a good business with favorable long-term prospects. It may or may not be. In the short or even intermediate term, long run business prospects and near term stock price action often have little to do with one another. Occasionally, expensive looking stocks even justify their valuation and then some (Amazon just may), but I'll let those smarter than I try to separate the pretenders from the real thing.

If you don't pay a premium for promise yet to be realized, you can't lose anything if that promise comes up short.

In contrast, pay a discount for the something proven and durable that can produce a nice risk-adjusted return even if nothing spectacular happens. Occasionally, they may even surprise with something unforeseeable on the upside, some latent capacity to produce future returns.

When they disappoint or turn out to be somewhat less fundamentally sound than thought, the discount is there to provide a margin of safety (though things can certainly go badly even with a margin of safety).

Well, that's the only way I know how to invest.

I should point out that, while I don't care for Amazon's stock, it's hard to not be impressed by the company's willingness to pursue big things with longer term outcomes in mind.

I'll be surprised if Amazon doesn't end up doing very well as a business in the long run but, compared to alternatives, I'm guessing most long-term investors in the stock (mostly non-traders that bought in recent years) will do much less well on a risk-adjusted basis.


* This folly is of little benefit to those attempting to buy shares of understandable businesses at a discount with the idea of owning them for a very long time. On the other hand, those in the business of playing short-term price action likely feels otherwise.
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Amazing Amazon
Amazing Amazon
Reviewed by jembe
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