Friday, January 07, 2011

Regarding Amazon & Growth

This morning's Wall Street Journal's Heard On The Street column is a cautionary note regarding Amazon. Martin Peers warns that Amazon's slipping DVD sales will undermine its stock price performance. The article is filled with all sorts of micro-analysis of media consumption and data on Apple's video downloads.

Like other analysts observing Apple, about which I wrote as an investment in this recent post, I believe Peers is underestimating Amazon.

Back when the online retailer was a profitless favorite of investors, my equity selection process avoided it. As the first price chart for Amazon, Apple and the S&P500 Index, going back to 1998 illustrates, I didn't miss much. Amazon pancaked in the tech bubble crash, then began a much more measured, sustained growth, along with Apple.

However, at present, every equity portfolio selected by my process which is active contains Amazon. It's actually more prevalent than Apple, and outperforming the S&P in every active portfolio in my strategy.

The second chart focuses on the last five years of performance for the three entities. Amazon and Apple share a very close performance path, both handsomely outpacing the index.

While Peers cites DVD sales growth as the reason to doubt Amazon's continued outperformance, I prefer to see the company's equity in the context of the broader market. While, as I mentioned, my process did not find Amazon acceptable in prior years, lately, it has become one of the most consistent performers in the S&P.

Peers writes,

"But Amazon looks to have lost the music battle......Given Amazon's success elsewhere, losing in video may only reduce its red-hot growth rate by a few percentage points. But given its sky-high valuation, that isn't something investors could ignore."

I guess that's one way to view Amazon.

Here's another. In recent years, the firm's growth rate is the 14th best in the S&P 500, while it's P/E ratio is 19th best. Taken together, the firm's valuation for its growth rate is quite reasonable. Much as Dell's was in 1998, when I owned it, contrary to the advice of most Dell-watchers. As I mentioned in the prior linked post, Dell went on to be one of the S&P's top ten total return performers that year.

As I also noted in the linked post, analysts who get totally focused on the internal mechanics of the companies they follow tend to lose, if they ever had it, perspective on the companies' performances among the broader market.

In this case, Amazon's general management of its businesses has sustained its performance for years. I would suspect that it's going to take a lot more than being an also-ran in just one particular product segment for Amazon's outperformance to end imminently.

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