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Originally Posted by SteveEisenberg
Amazon stock has a current price to earnings ratio of 319.93. This compares to 15.47 for Microsoft and 15.99 for Apple. Even if you think the stock market valuation is based on Amazon revenue one day matching that of WalMart (maybe 9.5 times higher today), the Amazon valuation still can't be justified except with the idea that Amazon is going to substantially increase margins. If you go with the more plausible idea that the market doesn't think Amazon will get quite as big as WalMart, the implication is even stronger that Amazon will move towards the high profit margin model we see with other tech companies.
Stock market valuations are sometimes driven by emotions rather than facts. But there is something to weak versions of the efficient market hypothesis that would imply we can't know in advance if the valuation is irrational. I don't think the PE ratio's implication that Amazon is going to gain enormous market power, so as to become a profit machine, can be dismissed.
Computer programming is hard work. I can't put a dollar amount on it, but creating a good web site for books is a high barrier to entry, if only because you mostly make your money off the backlist, which needs to contain hundreds of thousands of items. |
You want me to believe that Amazon's high PE ratio is an indication of the fact that they will increase, and successfully protect, higher profit margins? That's just perverse logic. An expectation of higher profit margins might explain a high PE, but claiming causality is perverse. This reasoning is just a non sequitur.
First, high PE could reflect an expectation for growth (and PE is generally assume to be, first of all, a proxy for growth), rather than for increased profit margins.
Second, we are talking about EXPECTATIONS. Are you trying to claim that Amazon has some secret plan to raise prices, but that the financial industry someone knows about it, while us ebook consumers are being drawn into the trap? Ya....
Third, higher profit margins don't necessarily mean higher prices, which you seem to imply. They could result from a different product mix and economies of scale (especially in a business that is dominated by fixed costs, such as e-commerce).
Barriers to entry? In no way will you convince me that barriers to entry in ebooks are anywhere comparable to those of setting up any brick-and-mortar type of outlet, or to retaining (even online) printed books.