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Amazon.com, Inc. (AMZN) – When Earnings Miss, P/E Takes Center Stage

Amazon.com, Inc. (NASDAQ:AMZN) posted record fourth quarter revenue but trailed earnings expectations by a mile. The online retailer reported $1 a share when the consensus was for earnings of $1.50 per share.

That’s a big miss. No wonder shares are taking a hammering. In today’s hyper volatile environment, it doesn’t take much for a stock to be punished. And Amazon provided more than enough reasons for investors to dump the stock.

Amazon.com Inc. (AMZN)

Does Amazon Deserve Such Stratospheric Valuations?

Growth names like Amazon command superior valuations. But every time profit expectations are not met, Wall Street invariably brings the focus back on price-to-earnings. And that’s what’s happening today.

Amazon.com, Inc. (NASDAQ:AMZN) has a trailing 12 month PE of around 800. That’s less important compared to forward estimates. Amazon has clearly demonstrated in the past its willingness to sacrifice earnings to focusing on growth. What’s perhaps much scarier is the forward PE which stand at over 100 – massively higher than its rivals in various businesses.

Of course, bulls will still say it doesn’t matter. And it shouldn’t, if you are a momentum player. Companies with rosy futures seldom have current earnings that match up to industry standards. But for those focused on fundamentals, the present market situation dictates that you take heed of PE.

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Amazon Needs Some Profit Under its Belt

Successful value investors have for long avoided Amazon given the firm’s penchant for focusing on market share, and not on profits. Amazon continues with its incredible spending spree. So earnings will likely suffer in the coming quarters. Now, with billions of dollars shaved off its market cap because of its latest recent earnings, it’s time to ask Jeff Bezos some tough questions. At what point will he say enough is enough…it’s time to earn some serious profits.

Until that question is answered, Amazon will continue to trade on sentiment and hope. And every time those hopes come crashing – like it did yesterday – investors will ask, “Is it worth holding such an expensive stock?”

Michael A. Yoshikami, CEO of Destination Wealth Management, aptly sums up the sentiment in CNBC. “As a fundamental investor, we are staying away from Amazon for the time being. When the valuation is more reasonable…and we have better clarity as to its plan to start turning a profit…we might jump in.”

“It simply is too much of a momentum play for our comfort right now. If you’re a fundamental investor, it’s probably not the right stock for you.”

Shares of Amazon.com, Inc. (NASDAQ:AMZN) are currently trading at $588, down 8%.

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Abhijit Sen

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