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The biggest risk to the company that I can see is the possibility of an economic recession brought on by inflation. The risk is that a recession will stall the company’s growth, but I don’t anticipate this being a long-term issue. That implies a P/E ratio of around 35.Īmazon shares look attractively priced to me. In 2021, the company generated just over $33bn in operating income. That’s unlikely to be a recurring issue, but it pushes up the stock’s P/E ratio. But I think that the P/E ratio is misleading here.Īn impairment charge in the last quarter has left the company’s earnings per share lower than they might otherwise have been. At current prices, I’m buying the stock for my portfolio.Īt first sight, the Amazon share price looks expensive, trading at a price-to-earnings (P/E) ratio of 55. ValuationĪmazon shares have fallen by around 33% since the start of the year. I think that the retail part of Amazon’s operations has a hugely valuable intangible asset. In my view, this is a hugely under-appreciated feature of Amazon’s retail operations. Just as customers know that nobody will have lower prices than CostCo, they know that nobody will get their goods to them faster than Amazon.
But I think it secures its reputation by having the fastest delivery times. It does this by having a reputation for providing the lowest prices anywhere.Īmazon doesn’t have the same reputation when it comes to price. In my view, the business is comparable to CostCo, which Charlie Munger views as a terrific company.ĬostCo has low margins, but it makes money by customers paying a subscription to shop there. But I think that focusing on the margins here is a mistake. Low margins can make this part of the business seem unattractive. Operating margins in this part of the business are much lower, typically around 5%. The remaining 86% of Amazon’s revenue comes from its retail operations. Last year, the business achieved 37% growth in revenue and 43% growth in earnings. That compares favourably to Apple (30%), Alphabet (30%), and ASML Holding (30%).ĪWS is also growing rapidly. The web services business has operating margins of around 35%, which is impressive.
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