It Doesn’t Pay to Doubt Amazon Stock
In some cases, tech firms add to the economy without taking anything away. Amazon.com, Inc. (NASDAQ:AMZN) is not one of those cases. In fact, the rise of AMZN stock can be viewed as a series of victories over rivals.
Just look at Barnes & Noble, Inc. (NYSE:BKS).
Once upon a time, it was America’s bookstore. Now the company faces declining sales, shuttered stores, and a crumbling stock price. In the past four years, there have been four different CEOs. It’s a complete mess, and Amazon is to blame.
This “creative destruction” has been amazing for Amazon shareholders. Early investors stared in wonder as the share price rose 30,000%, 40,000%, and even 50,000%! It was phenomenal.
The upward trek finally led AMZN stock to $1,000 per share. But don’t expect it to stop there. Amazon is continually starting new projects that could send the share price soaring.
Normally this signals corporate mismanagement, because investing in new projects can reduce the return-on-investment that shareholders are accustomed to from the core business…but Amazon is the exception to most rules.
That’s because CEO Jeff Bezos is insanely good at “capital allocation,” which is just a fancy way of saying that he knows how to invest wisely.
Don’t take my word for it, though. Try listening to Warren Buffett, who called Bezos “the most remarkable business person of our age.”
“I’ve never seen a guy succeed in two businesses almost simultaneously that are really quite divergent in terms of customers and all the operations,” Buffett said of Amazon’s founder-CEO. “I can’t think of another example like it.” (Source: “Amazon’s Jeff Bezos is ‘the most remarkable business person of our age,’ says Warren Buffett,” CNBC, May 5, 2017.)
Why Amazon Stock Won’t Stop at $1,000
As the greatest investor of all time, Buffett knows what he’s talking about—he has dealt with the smartest CEOs of the last half-century. So, if he thinks Bezos is special, it’s because the two of them share a talent.
A talent for making the right investments.
Buffett exercised his talent on Berkshire Hathaway Inc. (NYSE:BRK.B). It was a closed-end fund, so the share price kept growing as he made smart investments.
I think Bezos is going to use Amazon stock in a similar fashion. He hasn’t executed a stock split since the 1990s, and he confirmed that there won’t be a stock split in the near future. He’s obviously comfortable with a high price.
This means AMZN stock is not going to stop at $1,000. It could blow past that level with ease, setting pace to hit $2,000 by 2020.
Blame it on a relentless hunger for new projects, or the skill for winning those new markets, but I really believe Amazon stock is going to get there.
After all, lots of people doubted that Amazon would get here.
I can’t tell you the number of arguments I’ve had about AMZN stock. These weren’t crackpots, either. Reasonable investors—people I truly respect—were unable to see what made this company special.
“The price-to-earnings is insane! … Expenses are out of control! … Bezos is trying too many things at once!”
I’ve heard the criticisms. They sound convincing, but half the story is missing.
For instance, the price-earnings (P/E) ratio has been dropping steadily since “Amazon Web Services” (AWS) conquered the cloud computing business. It is now lower than the Netflix, Inc. (NASDAQ:NFLX) P/E ratio.
More to the point, cash outflows do not represent inefficiencies, but rather ambition. New money is funneled into new projects, and all projects are run on famously tight budgets. That is how Amazon rolls.
And, yes, Jeff Bezos is a busy guy.
He founded and runs one of the biggest companies on the planet, but he has the spare time to buy The Washington Post, turn its fortunes around, and even start a space exploration firm.