Amazon the King of all Growth Stocks Is Fairly Valued
To put it into perspective as to just how powerful the growth stock Amazon (AMZN) has been, all you need to do is consider historical performance. Had you had the foresight or good fortune to invest a mere $10,000 in Amazon on December 31, 1997 and held it through May 23, 2017, that $10,000 would be worth $1,935,025.93. That represents a 31.2% annualized rate of return in comparison to the stock market as represented by the S&P 500 where your annual return would’ve only been 5.8%. However, as exciting as Amazon’s performance has been, its record of generating earnings has been dismal in comparison. Amazon generates razor thin net profit margins, and as a result, has rarely produced much in the way of earnings. However, revenues and operating cash flows have been a different story altogether. By year-end 1996 Amazon produced a mere $16 million in revenues. However, by the end of 2016 Amazon produced almost $136 billion in revenues. Operating cash flow growth has also been exceptional. By year-end 1996 Amazon reported negative operating cash flow of $2 million. However, by year-end 2016 the company produced over $16 billion in operating cash flow. So even though Amazon has not been very profitable, it can hardly be considered a Ponzi scheme. The stock market has been willing to overlook Amazon’s lack of profits in favor of its enormous revenues and operating cash flows. On the basis of operating cash flow, Amazon continues to appear fairly valued. However, and as a cautionary note, prospective investors should at least consider whether the market will continue to give Amazon a pass on earnings. On the other hand, if capital appreciation is your goal, Amazon might be worth conducting further research on if you’re willing to value it on cash flows. Disclosure: No positions. Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.