Motley Fool: Big price, big prospects

Shares of Amazon.com (Nasdaq: AMZN) were recently priced near $3,500 per share – and the stock is still attractive at that level.

One reason the price is so high is simply because the stock has not split since 1999.

Amazon is seeing strong momentum across several important metrics, including e-commerce sales and cloud computing revenue.

Its revenue for the nine months ending Sept. 30, 2021, was $332.4 billion, up almost 28% year over year, helped by a 36% jump in cloud computing revenue from Amazon Web Services (AWS) and a nearly 70% year-over-year increase in the company’s “other” revenue, which is primarily composed of Amazon’s fast-growing advertising business.

And in the same period, net income increased 35%.

Analysts unsurprisingly expect huge growth in Amazon’s earnings. The current consensus analyst forecast calls for Amazon’s earnings per share to grow at a rate of 36% annually over the next five years.

Amazon’s high price shouldn’t deter long-term investors, as many brokerages permit buying fractions of shares. With $1,000, you might buy a third or a quarter of a share.

(The Motley Fool owns shares of and has recommended Amazon.com stock and options. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors.)

Ask the Fool

Q: When reviewing the financial statements of a company I’d like to invest in, what are some numbers to look at? – F.L., Worcester, Massachusetts

A: Evaluating a company closely before investing in it – by assessing and crunching numbers from its main financial statements (the balance sheet, income statement and statement of cash flows) – is a smart move.

On the balance sheet, little or no debt is good. Also check that inventory levels and accounts receivable are growing no faster than sales.

On the statement of cash flows, you’ll generally want to see that most of the company’s cash comes from ongoing operations – products or services sold – and not from, say, the issuance of debt or stock, or the sale of assets.

Positive and growing free cash flow is promising, too.

Strong profit margins (gross, operating and net) can be a sign of a high-quality company, reflecting proprietary brands or technology it can charge more for.

Check previous years’ numbers as well, to see whether margins have been rising or falling – and perhaps compare them with those of competitors.

You can learn how to calculate these and other informative measures by looking them up online. Our “Investing Basics” nook at Fool.com is also helpful.

Q: What are some good books on value investing? – W.P., Victoria, Texas

A: Try “The Little Book of Value Investing” by Christopher H. Browne (Wiley, $25); “Value Investing: From Graham to Buffett and Beyond” by Bruce C. Greenwald, Judd Kahn, et al. (Wiley, $35); or “The Intelligent Investor” by Benjamin Graham (Harper Business, $25). You can get a good introduction to investing in general from “One Up on Wall Street” by Peter Lynch (Simon & Schuster, $19).

My dumbest investment

In the 2000s, I bought shares of major offshore oil and gas drilling specialist Transocean for $71.

After my original investment doubled in value, I bought more, at close to $150 per share, doubling the number of shares I owned. I ended up selling all my shares for just over $30 apiece. Sigh. – R.M., online

The Fool responds: Ouch. That’s a hard loss, but maybe you can take a little consolation from the fact that shares were recently trading around $3 apiece? You lost a lot, but you clearly might have lost much more.

Experiences such as these are worth plumbing for any lessons to learn.

For example, think about what made you buy in the first place: What did you like about Transocean, and what were your expectations for it?

Looking back at the decision to buy, are you aware of any factors you failed to consider? Did you miss any red flags that might have caused you to sell earlier?

Transocean has often seemed a sensible stock to own, but during the time you owned it, it was whacked by the credit crisis of 2007 to 2008, which sent the entire stock market down sharply.

The falling price of oil didn’t help, either – nor did the pandemic, which has been hurting the global economy. The company’s future isn’t necessarily bleak, but it’s still facing some challenging times.