American Consequences - August 2017

(AAPL), Alphabet/Google (GOOGL), and Microsoft (MSFT), but they have a problem. They make gobs of profits, but they have no new businesses to invest in. Google, for instance, does spend about $13.9 billion on R&D, but they’ve still got $86 billion in cash. It’s not anywhere near Amazon’s method of spending everything it can. Somehow, Amazon doesn’t seem to have the same problem. It can always find a new place to put cash to work. Amazon can turn profitable – highly profitable – any time that it wants to. It can simply dial back the spending on some projects and the money will pile up. It’s done this before. In the fourth quarter of 2014, analysts expected earnings of $0.18 per share. Amazon doubled that by earning $0.45 per share. In the first quarter of 2016, analysts expected $0.57, and Amazon earned $1.07. Some suspect that Amazon chooses to do this on occasion just to prove to the market that

The risk in Amazon shares doesn’t come from its financials. It comes from valuation...


Amazon trades at a triple-digit price-to- earnings ratio today. There’s no way to sugarcoat that. It’s a very high valuation. But there’s many ways to look at it to see how it makes sense. Amazon could be much more profitable any time it chooses. That helps. Second, this is not an investment mania. It’s a business with phenomenal prospects. When shares get frothy, investors don’t fret over the future of the company. Rather, they buy at a price they know is undeserved simply because they believe they can sell for an even more undeserved price in the near future. That’s not the case with Amazon. Investors pay a triple-digit price-to-earnings ratio because they legitimately believe it’s got such a bright future that it will justify the price.

it can make profits when it wants to... Though no company’s management would admit to playing such games.

Aside from all that, Amazon does earn

positive free cash flow to the tune of $9.5 billion, holds $25 billion in cash, and has only a small amount of debt.

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