With shares of Amazon.com, Inc. (NASDAQ:AMZN) hitting new all-time highs above $1,000 this week, the sky-high valuation multiples attributed to this tech giant are beginning to become the focus of attention for many investors.
Year-to-date, Amazon has performed exceptionally well, posting a return of more than 32% for investors since January 1, more than doubling the return of the NASDAQ exchange over the same period of time.
Currently, Amazon trades at a trailing price-to-earnings (P/E) ratio of 186.8, with a forward P/E hovering close to 90. Amazon has traditionally maintained a higher-than-average P/E ratio over time, however at current levels, earnings would need to continue to increase substantially for an extended period of time before investors who may decide to get in at current levels would see the multiple come down to more normal levels. Amazon’s focus on revenues has clearly distorted the market’s valuation of Amazon, with price-to-sales and other revenue-related metrics typically used as valuation tools instead of the more traditional P/E ratio.
The e-commerce giant has now also now doubled the market capitalization of bricks-and-mortar rival Wal-Mart Stores Inc. (NYSE:WMT), a company which is expected to post annual revenues more than three times higher than those of Amazon, with substantially higher profitability levels as well.
Amazon.com is the future of retail, however at current levels, investors will need to assess how Amazon fits into a given portfolio value/growth investment strategy. In the past, I have had difficulty justifying Amazon’s valuation, and in my opinion, the valuation attributed to the growth portion of Amazon’s business has now simply become far too steep for this company to be considered a value investment.
