November 13, 2013 | In: Technology
Why Amazon (NASDAQ:AMZN) Can Get Away with a P/E of Over a Thousand
At the time of writing this post, Amazon is trading at a P/E (Price to Earnings ratio) of exactly 1,261.18, which means it’ll take Amazon 1,261 years and 2 months to pay back investors according to the market valuation and the current earnings. So, why this very high valuation? Do investors think that Amazon can have the same luck of a Japanese hot spring hotel? Or is it some kind of a scam to lure small investors to buy Amazon stocks and then burst the bubble? While these two are both a possibility, I think the main reason that investors value Amazon that high is because they trust its business model and because Amazon’s customers trust it.
Try buying something, anything, from Amazon, and tell Amazon that the product that you bought is defective, or that it didn’t live up to your expectations, and what do you get? A full refund (or, if you want, a replacement)! They’ll even send you a shipment authorization so that you can ship the product back for free. They don’t charge you with a 10% to 20% restocking fee (like Sony and others do), they don’t try to argue with you and blame your for the dysfunction, they don’t try to lecture you on why you bought the product if you didn’t need it or if you weren’t sure it was exactly what you wanted. They will just return the product, and in 99.99% of the cases without asking any question. That’s what makes them so powerful, because they are loved and trusted by their customers, because customers know that whatever product they’ll purchase from Amazon, Amazon will definitely stand behind that product (when even the company making that product refuses to stand behind it).
But, can that love translate into such a high P/E in the stock price? I don’t think so, I think Amazon is hugely overvalued, and any change in the customer sentiment towards Amazon can have disastrous effects on the stock price (I’m talking about AMZN trading at 1% of its current price if that happens for an extended period of time). But, for now, I think Amazon is fully aware that their overvaluation is linked to the level of support they provide. Let’s hope that whoever takes over after Bezos keeps this in mind.
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