Amazon.com, Inc. (NASDAQ:AMZN) on its first day of owning Whole Foods Market slashed prices as much as 43%. Amazon’s aim has always been sales growth and investors are just fine with that. A big part of the reason for Amazon’s ridiculous price to earnings multiple of 244 is that despite all the revenue that the company makes, it just doesn’t make much profit.
Consider that in the past four years Amazon has accumulated just $3 billion in profit. To put that into perspective, Amazon has amassed sales totalling $406 billion over that time, meaning the company’s profit margin is not even a full 1% of its sales. To add some more context to this, in Alphabet’s most recent fiscal year the company’s profit margin was over 21%.
Amazon cutting prices at Whole Foods is not a surprise because the company knows its investors don’t care about profits and are willing to pay significant multiples of earnings just to own a part of the company.
Right now Amazon’s stock price is riding the hype, but at some point bubbles burst and the lustre of owning the share will fade when a new stock grabs everyone’s attention. As long as Amazon keeps on innovating it may be able to sustain its price premium. However, at some point the company will lose steam and then the remaining investors will start paying more attention to profits and not just revenue. When that day comes, Amazon’s share price will be due for a major correction.
