Amazon's expensive reign atop S&P 500 nears end

PUBLISHED : Tuesday, 02 April, 2013, 12:00am
UPDATED : Tuesday, 02 April, 2013, 4:57am's days as the most expensive stock in the Standard & Poor's 500 Index are numbered as chief executive Jeff Bezos reaps profit from an US$18.5 billion spending spree designed to spur growth.

Amazon, whose stock has almost doubled in three years, trades at more than 700 times earnings, the highest ratio of any company in the S&P 500 - a ranking it has held for nine months. That multiple is predicted to fall to 48 next year, making Amazon the 10th-most costly in the benchmark index.

Investors are betting on higher earnings as Amazon sells more movies, music and books for the Kindle Fire tablet and gets additional outside businesses to sell items from its storefront.

Operating margin is projected to widen this year after contracting for two consecutive years as the company funnelled money into warehouses and improved its ability to deliver computing services over the internet.

"Investors have shown a willingness to accept a rich valuation for a company that's executing at a very high level and investing," said Tom Forte, an analyst at Telsey Advisory Group. "There's a belief that at some point, you'll have a margin recovery."

Founded by Bezos in 1994, Amazon has evolved from an online bookseller into a peddler of everything from designer clothing to digital downloads of books, movies and music.

After going public in 1997 and surviving the dotcom bubble, Amazon has long enjoyed the patience of investors, who have accepted the company's push for future growth at the expense of more immediate profit.

That has led to a rising share price even as earnings have tumbled, resulting in a lofty price-earnings ratio. eBay trades at 28 times earnings, while Apple, the world's most valuable company, trades at a multiple of 10.

Amazon shares have soared 98 per cent since the end of 2009, even as the company swung to a loss of US$39 million last year from US$1.15 billion in profit in 2010. Revenue surged 27 per cent to US$61.1 billion last year and may gain another 24 per cent this year, according to the analysts.

RBC Capital Markets analyst Mark Mahaney said shareholders had given Amazon the benefit of the doubt, speculating that margin pressure was a result of strategic investments that would make Amazon more competitive down the road.

"The market essentially normalised the company's earnings and said, 'I know margins are down from 6 per cent, but there's nothing structurally that's caused the margins to go down,'" Mahaney said. "The market has said, 'I'm going to buy the stock before the margins come back up because I'm confident they will.'"