Date
20 July 2018
Unlike the case with super-rich men in the past, Jeff Bezos' main business -- Amazon -- is not so profitable. Photo: Reuters
Unlike the case with super-rich men in the past, Jeff Bezos' main business -- Amazon -- is not so profitable. Photo: Reuters

Amazon valuation reflects changing investing concepts

Jeff Bezos, the founder of Amazon, has become the world’s richest man with his personal wealth rising to US$105 billion. That eclipses the record of US$100 billion previously set by Microsoft founder Bill Gates in 1999.

The majority of Bezos’ wealth came from his 17 percent stake in Amazon. The sprawling empire covering online shopping and cloud computing now commands a price-earnings ratio of 310.

That means if Amazon’s profit stays flat, the company market value is equivalent to 310 years of earnings.

1999 was the peak of last internet boom, and Microsoft’s market value reached US$618.9 billion, or 80 times earnings.

That was an exorbitant valuation level compared with companies in sectors like energy, banking and car industry.

Comparatively, Amazon’s valuation looks outrageous.

The willingness to pay such a high price shows that Amazon shareholders are not betting on Amazon’s profitability growth in the next few years.

In fact, Amazon is not likely to achieve earnings jump in the near term. Using a low-margin strategy to gain market share, its e-commerce business is still a money-loser. Thanks to cloud business, the firm manages to report some profit.

The company’s plan to keep making big capital investments will lead to heavy depreciation costs and thus low profitability.

The only way to justify investors’ bullish views is the super long picture.

Bezos’ vision is for Amazon to control the underlying infrastructure of the internet-based economy. When that happens, the company may gain big pricing power and start to reap some real profit.

Only time can tell if such investment thinking makes sense.

This article appeared in the Hong Kong Economic Journal on Jan 10

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Hong Kong Economic Journal columnist

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