If you're a stock market watcher, you already know that Amazon.com reported a blowout first quarter on Thursday, sending its shares rocketing higher and inspiring financial analysts and economic pundits to predict even more gains ahead.
One even predicted that Amazon, with a current market capitalization of just over $763 billion, could be the world's first trillion-dollar company. Its shares would have to rise only by another 30% — and given that they've risen 33% this year already, who's to say no?
Mm. We'll see. The current atmosphere of euphoria around the giant online retailer reminds me a bit of the all-time quintessential James Bond movie line. It's heard in "Dr. No," just after the title character explains to Bond his master plan.
"World domination," Bond replies. "Same old dream."
Amazon reported profit of $1.6 billion in the first quarter, more than double the profit from the same period a year ago, on quarterly revenue of $51 billon, up 43%. The result surpassed Wall Street expectations, sending the shares rocketing 3.6% Friday, to about $1,573 per share.
Whether Amazon's founder and chairman, Jeff Bezos, really is bent on running the world is hard to gauge. I'd suspect not. But there's no question that doubters of Amazon's continued march to retail domination are thin on the ground. One is Felix Salmon of Slate, who on Thursday delivered a cogent and useful corrective to the prevailing narrative of an unstoppable Amazon.
"The stock is supporting a narrative, which in turn is supporting the stock," Salmon wrote. "And the narrative is, frankly, looking a bit overstretched."
Salmon took particular aim at Amazon's announcement that worldwide membership in Amazon Prime, which gives members free two-day shipping and access to the company's video-on-demand programming, had surpassed 100 million. This was almost universally regarded as an astonishing number.
Yet as Salmon observed, late last year the marketing firm Consumer Intelligence Research Partners pegged Amazon Prime membership in the U.S. alone at 90 million. (Amazon never had released figures on Prime membership before Thursday.) That suggests that the 100-million worldwide figure might better be interpreted as a disappointment, not an achievement.
Investors also were thrilled at the news that Amazon will be jacking up the price of Prime by 20%, to $119 a year. The increase will put an additional $2 billion a year into the company's pockets once it's fully rolled out. That's a bit more than 1% of the company's total revenue of $177.9 billion (in 2017). And it's worth noting that Prime isn't pure profit: Amazon spent about $58 billion last year on fulfillment, marketing, and technology and content, all expenses linked to one degree or another to serving the Prime membership.
In any event, Amazon's share price is currently trading at a level that rational market analysts would say is priced almost for perfection. Its price-earnings ratio (based on the last 12 months' earnings) is a stratospheric 257.3. The P/E of the Standard & Poor's 500 is 24.3.
Investors' willingness to value Amazon shares so richly reflects the conviction that the company will continue to eat into the business of all its competitors, online and off. But it overlooks how little Amazon actually pockets from each dollar of sales — 1.7 cents. That 1.7% profit margin is about what a supermarket gets, and you don't find them selling for P/E's in the 250's. (The P/E of the supermarket chain Kroger is 12.25, half the S&P P/E.)
These expectations may or may not be rational, but they're probably closer to the latter than the former. Amazon's image as a retail juggernaut is based on a misconception of where it actually ranks in the retail universe — it commands 44% of all U.S. e-commerce sales, which makes it the largest online retailer, but still only 4% of total retail sales.
Then there's AWS, or Amazon Web Services, the company's cloud computing services, which are growing at nearly 50% per quarter. But as Bezos said in his quarterly letter to shareholders, "AWS had the unusual advantage of a seven-year head start before facing like-minded competition, and the team has never slowed down." The subtext there, however, is that it does have competition now — from lots of tech companies that see cloud services as a major growth center.
The real danger of stocks priced at these levels is that the higher the P/E, the thinner the knife-edge if something goes wrong. A hiccup in profit or revenue or Prime membership, and the revaluation of Amazon shares could be brutal — brutal for the overall market, too, because Amazon is one of the four "FANG" stocks — Facebook, Amazon, Netflix and Google (that is, Alphabet), keeping the tech segment percolating along.
The business landscape, after all, is littered with the bones of companies whose positions once seemed unassailable. Remember when Microsoft was dubbed the "evil empire"? Or when IBM deserved its moniker of "Big Blue"? General Electric still stands as the only company in the Dow Jones industrial average today that was in the index when it was created in the 19th century, but there's reason to doubt that it will be there much longer.
At this moment, though, Amazon euphoria is feeding on itself. Following the earnings report, analysts at Goldman Sachs, Morgan Stanley, UBS and many other brokerages raised their price targets for Amazon, apparently on the investment rule, which I hadn't heard before, that the time to buy is when a stock already is expensive.
No one quite forecast $2,100, the price at which the market cap would top $1 trillion — no one except an analyst at Macquairie Capital, possibly on the principle that when everyone else is jostling to be optimistic, the only way to get attention is to stake out the most extreme position. Of course, if the moment comes when everyone else is running for the hills, you'll have further to go to reach safety.