July 30, 2017
The NYT had a piece touting the recent run up in Amazon’s stock which briefly made Jeff Bezos the world’s richest person. It then turns to Hendrik Bessembinder, a finance professor at Arizona State University, who describes the company as “one of the greatest wealth creators since 1926.”
This designation as a “wealth creator” is based on its market capitalization of almost $500 billion. While this is a huge amount of money, it is not clear that Amazon’s current or likely future profits justify this price. Ultimately, stockholders value a company based on the profits it makes for shareholders and its current profits nowhere near justify its $500 billion market capitalization.
There have been other companies in the recent past that had stock prices that bore no relationship to their profits. AOL and Priceline are two that stand out, both with market capitalizations of well over $100 billion at the peak of the stock bubble in 2000. In both cases, the shareholders in these companies would have seen a huge amount of wealth destroyed if they bought them near their peak price.
The question is whether Amazon will be able to join the elite group of wealth destroyers if its stock price falls to a level more in line with its profits.
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