Amazon Justifies Its High Price, Again

Amazon.com (Nasdaq: AMZN  ) bears think its P/E ratio of 137 will undergo a correction to something saner, perhaps a little above the traditional average market P/E ratio of around 16, but the juggernaut of high valuation recently announced a new site to capture even more consumers. Take a look at AmazonSupply.com, the new marketplace that caters to "business, industrial, scientific and commercial customers."

The new digs
AmazonSupply offers products "from basic supplies like drill bits and automatic hand dryers, to hard to find parts like laboratory centrifuges and miniature polyimide tubing." In addition, orders can qualify for free two-day shipping, and there is a 365-day return policy, a dedicated customer service center, and corporate lines of credit that allow customer to pay up to 45 days later.

How did Amazon get into this business? Although the specifics were undisclosed in any annual report, Amazon acquired SmallParts, a supplier of "tubing, parts and fasteners for the medical supply and research industries" in 2005.

The new competition
With the new site, Amazon welcomes several new direct competitors. Staples (Nasdaq: SPLS  ) , the No. 2 online retailer by sales, hopes customers will keep pounding on their "easy" buttons. Staples recently boosted its dividend by 10%, with a yield around 2.9%.

Also, Home Depot (NYSE: HD  ) and Lowes (NYSE: LOW  ) will have to compete with AmazonSupply's offerings of plumbing, materials, and tools. The stores can take a breath with their paint and wood businesses, however, as AmazonSupply lists only spray-paint and doesn't offer lumber. Home Depot updated its website last year, and began offering a "Buy Online, Pick-up In Store" service, and redesigned the site so customers use fewer clicks to find products. Lowes introduced mylowes for homeowners to save room dimensions, paint colors, owner's manuals, warranties, wish lists, and reminders online.

The new arguments
Now Barnes & Noble and Best Buy won't be the only topics in discussions of online versus bricks-and-mortar. However, get ready for any of the following questions: Will business customers wait a few days for the tools, materials, and supplies? Or do AmazonSupply's target customers demand the immediacy of shopping in person? Will shipping these potentially heavy tools and materials continue to erode Amazon's margins, like many have claimed Amazon Prime has done? Are the current relationships between business and supplier too strong to disrupt? Will Home Depot and Lowes be caught up in a price-fixing scheme for e-wrenches? OK, maybe not that last one, but Amazon's move into this market will definitely spur some interesting dialogue.

While Amazon's high P/E might scare off some value investors, I believe its constant moves into new markets completely justifies its price. For two other stocks -- along with Amazon -- that might help you build your own wealth, check out our free report: "3 Stocks That Will Help You Retire Rich".

Fool contributor Dan Newman thinks delivery workers might not appreciate delivering boxes of bronze bars. He owns shares of Amazon.com, but no other company mentioned above. Follow him @TMFHelloNewman.

The Motley Fool owns shares of Amazon.com and Staples. Motley Fool newsletter services have recommended buying shares of The Home Depot, Amazon.com, and Staples, as well as writing covered calls on Lowe's. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 24, 2012, at 3:41 PM, ETFsRule wrote:

    "While Amazon's high P/E might scare off some value investors, I believe its constant moves into new markets completely justifies its price."

    This would be more meaningful if you used some numerical analysis to show how Amazon's growth rate supports its P/E.

    What if its P/E was 200? Or 1000? At what point would you consider it to be overpriced?

  • Report this Comment On April 24, 2012, at 3:42 PM, setht23 wrote:

    Amazon is a great innovative company that has a vision for the future. I'd love to buy it at around a 20-30 P/E @ 134 No thank you. I'd rather make the mistake of not buying and losing out on possible growth then buy and get crushed if the market corrects the overvaluation.

  • Report this Comment On April 24, 2012, at 6:40 PM, miclombardo wrote:

    According to Graham, a growth stock with a P/E of 137 is expected growth its earnings of over 64% per year in the following seven/ten years.

    Do you really think Amazon can achieve that?

    Also "there is really no way of valuing a high-growth stock […] in which the analyst can make realistic assumption on BOTH the proper multiplier for current earnings AND the expectable multiplier for future earnings". As far as I understand, Graham points out the impossibility to value a stock with such a meteoric P/E. But he was talking about value...

  • Report this Comment On April 24, 2012, at 6:49 PM, CaptainWidget wrote:

    Love everything about Amazon but the price. It may earn out to expectations, but the downside risk is huge that it won't.

    There's just too many undervalued winners out there to bet on an overvalued winner. I wouldn't go so far as to short Amazon, public sentiment may float their valuation for a very very long time. But the day that earthquake comes along and shatters public sentiment, it could (and probably will) all come crashing down.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1869705, ~/Articles/ArticleHandler.aspx, 9/2/2014 5:46:30 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement