NEW YORK (TheStreet) -- Amazon (AMZN) investors can be forgiven for believing profits are inconsequential. Year after year Amazon has successfully sold the idea that when they finally do push some of the top line down to the bottom line it's "going to be astronomical."
Eighty-four is the number that should burn inside the head of anyone considering picking up this ticking time bomb. Amazon's price-to-earnings multiple is 84. Historically, stocks with a price-to-earnings ratio of over 20 don't perform above average. Currently the S&P 500-tracking SPY (SPY) has a multiple of about 15.5.
Buying a stock because familiarity with the name of the company and enjoy the products is a terrific way to get your head handed to you.
Investments are based on numbers. At the end of the day the only thing that goes into a bank account is profits. Without profits, there is nothing. Amazon doesn't have any profits, and there is little to demonstrate the situation will change any time soon.No profits? How can you say "no profits" when Amazon's net was $631 million in 2011 and over a billion dollars in 2010? We can all agree a billion dollars is a lot of money, and if it wasn't for the fact the profit pie gets sliced up into 450 million pieces, I may have a (slightly) different viewpoint. After dividing up the profit with all 450 million shares, each share is left with $1.39 in earnings for 2011. At a price of $216 per share, it will take 155 years' worth of 2011's earnings to pay for one share of Amazon. The price-to-earnings number of 84 I started the article with is the forward earnings, assuming profit improves. Amazon bulls are quick to point out how quickly Amazon is growing the top line. Amazon's revenue was $24.5 billion in 2009, $34.2 billion in 2010 and finally $48 billion in the last reporting year 2011. Amazon, to the delight of the market, has sacrificed profits in the name of revenue growth.
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