May 16, 2018
Kevin Roose had a piece in the NYT about the large number of tech companies that are going public without ever having made a profit. As the piece points out, the strategy is to use low prices to build up a large market niche and then jack up prices once people become dependent on the company.
Roose touts Amazon as a successful model for this strategy:
“Those years of investments paid off, and Amazon is now the second most valuable company in the world, with $1.6 billion in profit last quarter alone.”
While it’s fine for a company to make $1.6 billion in profit for a quarter, Amazon now has a market capitalization of more than $780 billion. Assuming its other quarters are equally profitable, the company has a price to earnings ratio of more than 120 to 1. In order for Amazon’s stock price to make sense, its profits will have to increase by almost a factor of ten from its current level. While this could happen, Roose may want to find another company as an example where its profit growth has already managed to justify the price shareholders paid for the company.
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