NEW YORK (F.A.S.T. Graphs) -- I've been analyzing common stocks for the better part of five decades, and I've never come across a stock that was more amazing and befuddling at the same time than Amazon (AMZN - Get Report). After going public in May of 1997, the company did not generate a dime's worth of earnings until 2004.
Then, from 2004 to 2010, Amazon grew earnings at a staggering compound annual growth rate of 55%. Moreover, during that timeframe, Amazon's stock price closely correlated to and tracked their earnings growth. This all made sense, and was as it should have been. Great earnings generation produced a powerful advance of their stock price, and all was well with the world. The following earnings and price correlated charts presents a graphic depiction of Amazon's earnings and price correlated record from 2004 to 2010.
Another plausible explanation for Amazon's stratospheric stock valuation might be expectations of future earnings growth. The following "Estimated Earnings and Return Calculator" is based on the consensus of 20 analysts reporting to Standard & Poor's Capital IQ.These 20 analysts forecast that Amazon will grow future earnings at a rate of 34.1% per annum over the next five years, a very large and attractive growth rate. When you consider that the dark orange line on that graph represents a P/E ratio of 34.1, you get an immediate perspective of how frothy Amazon's share price currently is. Sure, expectations for growth are staggeringly high, but even at that enormous rate of growth, future earnings would not support Amazon's stock price and high valuation.
This begs the question: Why can't Amazon bring its strong sales to the bottom line? To me, this is a big negative, because as a shareholder, all I could ever expect to be rewarded with must come from earnings and/or dividends. Amazon does not seem capable of generating either, in spite of its enormous sales success. To me, this is quite troubling.