Nov 19th, 2009
Has Amazon Gotten Too Expensive?
One of the stocks I own–in rather low quantity–is Amazon.com Inc. (AMZN). It was one of the stocks I looked at when I decided to stop buying into Apple, Inc. (AAPL) because it met a few important criteria for me: I’m a customer myself, the company is profitable, and they are, in my opinion, the best in the world at their primary business (Internet retail). They also have a toe in other businesses where they may not be the best (the Kindle electronic book reader, the Amazon MP3 music store, and the Amazon Unbox online video rental store). Not too long ago, the stock had a huge uptick of more than 25% in one day, where it went from the mid 90s to over $120. The stock has continued to soar and currently stands at $132.97.
That’s a huge gain in a short period.
I try to evaluate how expensive a stock is not by their share price, but by their price to earnings ratio, meaning to take the stock price and divide it by its yearly net profit. By that estimate, AMZN is at $78.40.
Compare this to other high tech companies like Apple’s $32.51, Google’s $36.90, Netflix at $32.87. Or maybe in the non-tech sector, other stocks I own and like such as Altria Group Inc.’s $12.61, Philip Morris International’s $15.89, or RPM International’s $20.34. Heck, the S&P 500’s price to earning’s ratio, measured by the exchange traded fund SPY, has a P/E of $16.05.
What does that tell me? It tells me that AMZN is currently pretty expensive by that measure.
While I do like them a lot, I suspect that is a candidate for me to sell around the end of the year.
