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Amazon delivers growth
6/23/2017 9:52:20 AM
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Wealth Builder
Gordon Pape writes on common-sense wealth-building strategies.



By Gordon Pape  | Monday, April 10, 2017


 

BUILDING WEALTH WITH GORDON PAPE
 

One of the most significant business stories in the past few months was the announcement from Amazon.com Inc. (NASDAQ: AMZN) that it plans to create 100,000 new full-time jobs in the U.S. over the next 18 months. That’s a huge commitment by a single company, and it puts an exclamation point to the sea change that is taking place in U.S. retailing. Only a few days before that announcement, Macy’s Inc. (NYSE: M) and Sears Holdings Corp. (NASDAQ: SHLD) both announced nationwide store closures and layoffs after a disappointing Christmas season. Macy’s will close 68 stores and shed 10,000 jobs while Sears will shutter 150 stores (most of which operate under the Kmart brand). And in its annual report released March 21, Sears warned that “substantial doubt exists related to the company’s ability to continue as a going concern.”

Clearly, traditional retailers can’t keep up with Amazon’s on-line convenience, low costs, and fast delivery and are running up the white flag. It’s akin to what happened to the big booksellers when Amazon first came on the scene, only on a much larger scale.

The announcement plays right into the hands of President Trump, who has made job-creation his number-one priority. His team was quick to take some credit, saying he “was pleased to have played a role in that decision by Amazon.” It’s not clear just what role Trump actually played, but U.S. corporations are quickly learning that it’s prudent to stay on the right side of the mercurial President.

In making the announcement, Amazon said it will increase its staff by 55%, to 280,000 by mid-2018. “These jobs are not just in our Seattle headquarters or in Silicon Valley – they’re in our customer service network, fulfillment centers, and other facilities in local communities throughout the country,” said Jeff Bezos, Amazon founder and CEO.

The company said that the new jobs won’t be only entry-level positions but will involve hiring people with all types of experience, education, and skill levels, ranging from engineers and software developers to those seeking on-the-job training. Amazon’s core business is retailing, but the company is involved in a wide range of other ventures, including cloud storage, streaming video, on-line music, and its revolutionary new voice control system, called Alexa.

Whether or not Trump was in some way involved in encouraging Amazon to create the 100,000 jobs (doubtful), it was a big boost for his core objective, especially in the wake of the Sears and Macy’s announcements. It’s also a huge vote of confidence in the company’s future and raises the question of just how big Amazon is going to get and whether it’s worth investing in the stock at this stage.

On the surface, the metrics are very unattractive. Amazon shares closed on April 7 at $894.88 (figures in U.S. dollars). It has a trailing 12-month price/earnings ratio of 182.69. The fourth-quarter profit margin was a tiny 1.72%. This is a company that needs to keep generating massive sales growth to justify its sky-high share price.

So how is it doing in that regard? Very well, actually. Sales in the fourth quarter (to Dec. 31) were $43.7 billion, up 22% from $44.68 billion in the fourth quarter of 2015. For the full fiscal year, the company reported sales of $136 billion, up 27% from the $107 billion of sales in 2015.

Those numbers are impressive but they don’t translate into a fat bottom line. Fourth-quarter earnings were $749 million ($1.54 a share, fully diluted). For the year, Amazon’s final 2016 earnings were $2.4 billion ($4.90 a share), which gives Amazon a trailing p/e ratio of 182.63 based on the current price. The consensus estimate for 2017 is $7.11 per share, which puts the forward p/e at 125.86.

By comparison, Facebook has a trailing p/e of just under 50, Alphabet Inc. (NASDAQ: GOOG) is at slightly below 30, and Apple Inc. (NASDAQ: AAPL) is at about 17. Among the big high-tech giants, only Netflix Inc. (NASDAQ: NFLX) is more expensive, with a p/e of 340. Amazon would have to earn about $25 per share, or about three and half times times its projected 2017 profit, to get its p/e into the same range as Alphabet, and that’s assuming no increase in the share price.

So does that mean don’t buy? Anyone who made that call in the past turned out to be dead wrong. Five years ago, you could have bought shares for less than $200. There have been bumps along the way, but the trend line is steadily upwards, and the stock is trading above both its 50-day and 200-day moving averages.

Amazon is a long way from being the world’s largest retailer, trailing companies like Walmart, Costco, and Walgreens Boots by a large margin. But it’s growing faster than any of the others, and I wouldn’t bet against it gaining the number-one spot at some point in the next decade.

So despite the ridiculously high p/e, I’ve added Amazon to my recommended list, but only for buyers who clearly understand the stock is expensive at this level. I happen to believe it will be even more pricy a year from now. Certainly, after the job creation announcement, the company should be on Donald Trump’s most-favored list, even though Jeff Bezos owns the anti-Trump newspaper, The Washington Post.

Ask your financial advisor if this stock is suitable for you. I do not recommend it for conservative, low-risk investors.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletter, which are available through the Building Wealth website.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.

Notes and Disclaimer

© 2017 by The Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

BUILDING WEALTH WITH GORDON PAPE
 

 
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