Amazon Investors Give CEO Bezos Room to Run By

Amazon Investors Give CEO Bezos Room to Run

By Danielle Kucera and Roben Farzad

http://investorshangout.com/board/53324/AmazonCom-AMZN

Amazon.com’s (AMZN) Jeff Bezos has the kind of investors any chief executive officer would envy. While others must contend with restive shareholders who demand steadily increasing profits or bigger dividends , Bezos has nearly free rein to pursue his strategy of ignoring earnings and spending heavily to expand into new businesses. The stock is up more than 40 percent over the past 12 months, and in March traded at more than 700 times the previous 12 months’ earnings—the highest price-to- earnings ratio of any company in the Standard & Poor’s 500- stock index . It had held that ranking for nine months, losing it only after announcing a loss of $39 million for 2012, which made calculating the p-e ratio pointless.

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. “Investors have shown a willingness to accept a rich valuation for a company that’s executing at a very high level and investing” in growth, says Tom Forte, an analyst at Telsey Advisory Group. They are betting that higher earnings will follow, he says.

In the early days of the Internet, some investors spurned traditional valuation measures such as earnings growth rate, saying they weren’t useful in assessing new companies. Craig Sterling, head of equity research at EVA Dimensions, says that’s still true when it comes to Amazon. “We actually use Amazon as an example of why traditional cash flows and earnings are nonsense” for investors, he says.

Warehouses account for much of Amazon’s outlays. The company is using them to transform itself into a marketplace where other merchants can use its technology and website to sell their products. Amazon takes a commission—which is almost entirely profit—for each item sold and collects additional fees when the smaller retailers use its network of fulfillment centers to ship goods, according to Mark Mahaney, an analyst at RBC Capital Markets. Amazon has also made deals with Sony (SNE), Time Warner’s (TWX) Turner Broadcasting and Warner Bros. units, Walt Disney (DIS), and other providers of movies and TV shows, ramping up competition with Netflix (NFLX).

Eric Jackson of hedge fund Ironfire Capital says the stock price is too high in relation to the company’s earnings. “It does seem to be a cult, and everyone seems to be a worshiper of Bezos these days,” he says. “I don’t fault the guy at all. I just shake my head at the ardent stock followers.”

Still, there are signs that Amazon’s strategy is paying off. In the fourth quarter, Amazon’s profit margin in North America, where it generates 57 percent of its revenue, expanded to 5 percent from 2.9 percent a year earlier, buoying the stock. Mahaney says investors anticipate further increases in profit margins. “The market has said, ‘I’m going to buy the stock before the margins come back up because I’m confident they will.’?”

The bottom line: The rise in Amazon’s stock price after a year of losses is a sign investors are willing to wait for profits while the company invests in growth.

Kucera is a reporter for Bloomberg News. Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad