In 1999, to justify the technology prices, we investors were told that earnings didn’t matter anymore. The world had changed. What really mattered was how many people used the product. Of course, that line of reasoning fell apart within a matter of months. Earnings always matter. People just forget that from time to time.
In a another sign that history may not repeat, but it does rhyme, we are being told again that current earnings don’t matter. But this time what really matters is future earnings. And since certain companies will take over the world, massive future earnings are inevitable.
Amazon is the poster child for this line of reasoning. Even normally staid observers such as Barron’s seem goggle-eyed at the awesomeness of Amazon.
Amazon sells at more than 100 times expected 2017 earnings. True, in the last couple of years earnings have grown fast, but for how much longer? Some analysts now attach a long term growth rate of more than 50% to earnings, reminiscent of technology sector projections of 1999. A high projected growth rate can justify almost any price.
Amazon just announced a deal to purchase Whole Foods, a business with low margins and intense competition. This should bring down Amazon’s potential earnings growth rate, but Amazon’s stock rose on the announcement. Apparently, Amazon will take over the entire grocery business. And just wait until they decide on the next business to dominate!
World domination is a bit harder than it looks. Investors beware.