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Amazon's Gross Margin

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Much has been said about how Amazon's high stock price is unjustified. This morning my boss sent me a link that reminded me again how ridiculous Amazon's share price has gotten as of late. The article summed it up well by noting that if Apple were to have the same PE ratio as Amazon, its share price would be $145,000.

I suppose another way to even better demonstrate this insanity is to use the same equation on Berkshire Hathaway class A shares, which would send them to an astronomical $31 million/share.

My boss tried to justify Amazon's stock price by mentioning their high profit margins. So I decided to take a look at what Amazon's gross margins are and how they compare with some other companies. Here's a short list:

  • Amazon: 25%
  • Apple: 39%
  • Google: 57%
  • eBay: 69%
  • Microsoft: 74%
  • Intel: 63%
  • Priceline: 82%
  • Wal-Mart: 25%
  • Ford: 18%
  • Oracle: 80%
  • GE: 26%

As you can see Amazon's gross margin is way below its peers, but in line with that of Wal-Mart's. Proof that Amazon is nothing more than a glorified, high-tech super store.

As to why its stock continues to rise despite any rational justification, another person said it well. Traders play Amazon as a momentum stock and it has become a self-fulfilling prophecy. Logic indicates that it should come down crashing hard, but this stock escaped logic long ago and it'll be foolhardy to bet against it now.

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