Happy anniversary! Amazon stock rose 49,000 percent in 20 years

According to columnists Jason Zweig, Amazon’s stock has risen 49,000 per cent, despite a 94 per cent collapse in its shares when the tech bubble burst at the beginning of this century.

Amazon marked its 20th anniversary as a publicly traded company on Monday — and Chief Executive Jeff Bezos has the reason why to celebrate. Amazon closed its first day of trading on May 15, 1997, at $1.96 a share, after a 30.5 per cent rise that day. Today the stock trades at $959.

It means that investors who did a $5,000 investment in the online retailer in 1997 with Amazon would have enjoyed a return of $2.4 million today.

However, the rise of Amazon’s share price has not been smooth. The stock has been split multiple times over its lifespan. Share splits happen when investors get, for example, five shares for each they already have. These actions reduce the value of each share but prevent them becoming too expensive.

Many investors own Amazon through various funds, as it has become a favourite toy for those who target growth. According to Financial Express, even 113 of the 3,636 funds included in the classification system of the Investment Association, have Amazon as a top-10 holding.

However, many investors are concerned about the valuation of the company, and whether it can be justified.

On a price to earnings (p/e) basis, it has repeatedly looked untenable. The p/e ratio measures share price relative to annual earnings per share. At times Amazon’s p/e has registered in the thousands, and its average since 1997 is 236.

Think before investing in Amazon

According to Forbes, today, Amazon’s market cap is about $465 billion. Comparing with other public companies, for example Berkshire Hathaway, it has a bit bigger market cap. So, many investors would buy Amazon instantly. It is bigger; it is a technology company with a bright future and so on. Moreover, its stock price has risen far beyond what Berkshire’s stock has done lately.

And Berkshire is a boring old company that invests in utilities, railroads and other tedious industries. It is even not a contest, right? Not so fast…

There is one small (big) problem with Amazon earnings. In the last annual report, Amazon announced about $136 billion profit in 2016. But with this amount, Amazon has earned just $2.4 billion. In contrast, Berkshire reported revenues of $223 billion and earned over $24 billion.

At the current rate of earnings, it will take Amazon nearly 10 years to equal just one year of earnings at Berkshire. And of course, Berkshire is $60 billion cheaper than Amazon.

There are some other problems with Amazon. It is operating margins are a paltry 3 per cent. Its net margin comes in 1.7 per cent. Berkshire sports an operating margin of about 14 per cent, and more than 10 cents from every dollar in revenue finds its way down to net income. Berkshire’s free cash flow is double Amazon’s.

These valuations have not prevented the share price from rising, and many investors see Amazon as unique and almost impossible to imitate.

The business is notoriously guarded in terms of explaining its investments – even to fund managers – but many investors believe in its ability to innovate and disrupt existing sectors to continue to deliver growth.

How about others?

Continuing the comparison with other giants, the best two-decade rise from its IPO was Bill Gates’ Microsoft, which increased 27,010 percent 20 years after its launch in March 13, 1986.

According to New York Post, Apple completed its first 20 years as a public company with a relatively small gain of 116 per cent. However, Apple got flattened when the dot-com bubble burst just prior to Apple’s 20th anniversary on Dec. 12, 2000.

However, Apple stock performed much better in its first 19 years, clocking a 622 per cent gain leading up to the dot-com collapse than it did in its first 20 years.

A tech performer to watch, of course, is Alphabet, parent of Google, which was founded by Sergey Brin and Larry Page. Its stock is up 1,770 per cent in its first 13 years as a public company, but it had better turn up the pace of increases if it is to close in on Amazon.

 

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