Amazon reaches a trillion dollars, what next?

It’s got a PE ratio of 185, now it recently passed a trillion dollars: but will the Amazon river turn to poison?

Article updated: 5 September 2018 9:00am Author: Michael Baxter

If you had invested $1,000 in Amazon in 1997 when it was floated, right now that investment would be worth around $1.1 million.

Even if you had timed your investment such that you had invested in the company at the worst possible moment, during the height of the dotcom boom, you would still have increased your wealth ten-fold.

For many years analysts often used to lump Amazon and eBay into the same category — the next tier down from Apple, Microsoft and Google.

Not anymore. The market cap of eBay is $35 billion, shares have increased 44-fold since the 1998 float — not bad, but if corporate growth was a race, Amazon would have lapped eBay several times over — Lewis Hamilton in his F1 Mercedes racing against Mo Farah in his running shoes.

The four biggest techs — Apple, Amazon, Microsoft and Alphabet have a combined market cap of $3.7 trillion.

Is it a bubble?

I have been arguing here, ever since I first argued anything here (that was in 2009) that this is nothing like the dotcom boom. It is no bubble. Apple’s PE is 19, Microsoft’s is 29, and Alphabet’s 32. Those numbers might seem high, but they hardly scream bubble. And when you consider their growth trajectory, I am not even sure the PEs are excessive.

Amazon’, by contrast is 185. I wouldn’t blame you for feeling a little uneasy about that.

On the other hand, profits increased by 1,286 per cent in the second quarter of 2018. And while 50 per cent of online sales in the US go to Amazon, it only has five per cent of all US retail sales.

If you believe, as I do, that online sales are going to carry on rising, grabbing a much bigger market share over the next few years, even in the US, the company’s home market, there is lots of room for growth.

The potential for Amazon worldwide is much greater, although it is not doing so well in China, competing against China’s own giant techs.

An important part of Amazon’s growth in recent years has come from cloud services — this is a B2B company as well as a massive retailer.

Then there is its own plan to muscle in on Netflix turf — and indeed Disney’s turf

The wealthiest man

Jeff Bezos, the boss, is now worth $167 billion. That is roughly $20 billion short of the net worth of Bill Gates and Warren Buffett put together.

But the Bezos and Buffett approach have something in common. The sage of Omaha once said: “My favourite time frame to hold a technology stock is forever.” Jeff Bezos puts emphasis on long-term thinking. He once said: “Ask everyone not to think in two to three-year time frames, but to think in five to seven-year time frames.” He says that if someone congratulates him on a good quarter he might politely say ‘thank you’ but thinks that “those results were baked in several years earlier. I am working on a quarter that will happen in 2020, not the next quarter.”

What next?

No one knows what’s around the corner — when the next financial crisis will occur, the next big economic shock. Some tipsters get around this by predicting doom every day, so that when something bad does happen they can say ‘told you so.’

As it happens, I do think the global economy is displaying bubble-like symptoms, right now. But one of the lessons of the 2008 crisis is that techs were not so badly affected — an investment in a tech was quite a good hedge against the broader market.

I don’t think that has changed. We live in an age of accelerating technology. I believe that within ten years people will be talking about who will be the first $10 trillion company. Just like Lewis Hamilton before a big proportion of Formula One races, Amazon may well be in pole position.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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