Amazon’s performance critical for investors and the tech industry

Indian Stock Market Watch
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I know of one company listed on the U.S. Stock market which has the following data points:

Forward Price/Earnings Ratio (FY 15) shown at Yahoo Finance is 250;

Reported recently the highest quarterly loss in in about ten years of $427 million;

$ 75 billion in revenues was generated by the company in 2013.

Any guesses on which company I am referring to? Yes, it is the truly amazing Amazon.

Why would investors continue to repose faith in such a company? One, Amazon has done a great job in the retailing space in serving customers. Two, since even today internet sales account for less than 10% of total retail sales in the US, investors have felt that Amazon, despite its unsteady record of profitability over twenty years, is a true long term profit story. Three, the larger than life figure of the founder, Jeff Bezos, has captivated analysts and investors.

Amazon has now reported two consecutive quarters of losses. The stock is down about 27% from its peak late last year. But is this enough?

Google is a somewhat similar sized as Amazon - Google’s revenues in 2013 were $60 billion – but far more profitable, and yet trades at a forward P/E of only 19 compared to Amazon’s 250. Assuming my maths is correct, if Google were valued on the same P/E as Amazon, its market capitalisation would be $4855 billion instead of $370 billion, or if Amazon were to be valued at the same P/E as Google its market cap. would be $10 billion instead of $134 billion!

From my perspective, far too much seem to ride on the confidence investors have in Amazon’s ability to generate profits in the long run. Jeff Bezos has repeatedly chosen to invest, not entirely successfully, rather than pursue profits on a quarter to quarter basis. This to me makes sense if this is accompanied by focus on a particular industry. But Bezos has Amazon investing in an amazing variety of industries apart from retailing: cloud computing, smart phones, e readers, drones, TV shows … At the same time, Amazon discloses very little about the details of these investments.

And will Amazon run out of cash?

If investors lose faith in Amazon, then it could lead to loss of faith in the tech market and perhaps even the first serious correction in the US bull market since 2008. Another scenario is that investors lose faith in the Bezos model of business: visionaries at companies such as Google, Facebook (Amazon is an extreme example) pursuing long term profits but doing so through highly speculative, or shall I say forward looking, investments in fairly diverse industries. One thing appears more certain, investors will lose faith in tech companies that do not make profit and even more so if they do not have any revenues – and today we have some high profile ones with sky-high valuations.