Motley Fool: A great grower at a fair price
For decades, shares of Amazon.com (Nasdaq: AMZN) have often seemed too pricey. But recently around $180 per share, they’re looking fairly priced, with a forward-looking price-to-earnings (P/E) ratio of 43, below the five-year average of 56.
The e-commerce and cloud giant posted boffo 2023 results, with revenue up 12% to $575 billion and net income of $30 billion. Amazon Web Services (AWS), the leader in public cloud infrastructure and services, is growing operating profit margins robustly.
With cloud computing very much a high-growth market, AWS still has incredible potential. Meanwhile, in its core North American e-commerce market, Amazon is in the early stages of unlocking profitable gains – recently launching ads on Prime Video, for example.
Software-based business models (of which Amazon really has two, an e-commerce marketplace and public cloud services) are often called “infinitely scalable.”
Amazon is just starting to flex its “infinite” superpowers. In 2022, for the first time, it recorded more full-year service revenue than product sales – and it’s the services side that has the profit margins investors want to see.
Amazon isn’t a cheap stock, but if you believe it will continue growing for years to come, this remains a top buy-and-hold stock for the long haul.
(John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and has recommended Amazon.com.)
Ask the Fool
Q. I gather that inflation has come down. So are we now experiencing deflation? – F.L., Sheridan, Wyoming
A. We’re nowhere near deflation, which is when prices are actually falling. The inflation rate in the United States tends to go up and down in a somewhat limited range, though it can be particularly high or low at times.
After hitting a four-decade high of 9.1% year over year in June 2022, the consumer price index has trended down, staying below 4% since June 2023 and hitting 3.5% in March.
Those numbers reflect prices that are increasing, which is still inflation – just slower inflation.
Deflation can sound great, as we’d all like lower prices, but it’s hard on borrowers, who must repay debt with dollars that are worth more than the dollars they originally borrowed.
It can also depress the economy as consumers put off purchases, anticipating lower prices, and employers hire fewer workers, raising the unemployment rate
Q. Why might a stock start trading one morning at a very different price from where it closed the day before? – C.B, Fort Lauderdale, Florida
A. Something notable probably happened after trading closed – such as a very strong or weak earnings report, news that the company is being bought out or is buying another company, a big change in management, or the suggestion of a scandal or legal mess.
Even a rumor can move a stock.
Lots of buy or sell orders accumulating overnight can lead to a sharply higher or lower price as the market opens. (Remember that stock prices reflect supply and demand, so if many people want to sell, the price will fall to a point at which some will buy – and vice versa.)
My dumbest investment
My best and worst investment happened when Tesla first went public in 2010. I bought at around $24 per share, and have held ever since.
I’ve owned a 2000 Ford Ranger EV pickup truck since 2008, love the idea of electric vehicles and wanted to own a souvenir of the first EV mass-production company. (I framed the actual stock certificate and hung it by my desk.)
Unfortunately, I had no faith that Elon Musk could actually make a success of this – and still can’t figure out how he did it – so I bought only one share. – J.D., Shoreline, Washington
The Fool responds: That’s some story.
Since Tesla’s initial public offering, it has split twice – first 5-for-1 and then 3-for-1.
Those splits would have turned your one share into 15 shares, and shrunk your cost basis from $24 to about $1.60 per share. Given that Tesla has recently been trading near $168 per share, your gain is around 10,400% – or almost $2,500.
Tesla has been a particularly volatile stock, having traded above $410 per share (split-adjusted price) back in late 2021.
It also has passionate believers and strong doubters. Bulls have high hopes for the company’s electric vehicle, autonomous vehicle and battery businesses, expecting profit margins to increase as production volume grows. Bears note that Tesla faces a lot of competition, and that solar panel and battery prices may drop over time, hurting profits.