The blow and burst of Dotcom Bubble is long gone, almost forgotten; even for investors who made and lost fortunes riding it. Yet some investors continue to apply dotcom metrics to one of the survivors: Amazon.com (AMZN).
The company's stock is a rising angel, but it may be flying too close to the sun, like Icarus in the ancient Greek legend. Trading at close to 100.59 times December 2013 earnings, Amazon's stock is roughly 10 times more expensive than Apple's (AAPL) stock and 7 times more expensive than Google's (GOOG).
Why does Amazon command such a high multiple?
Qtrly Revenue Growth (yoy)
Qtrly Earnings Growth (yoy)
The answer is "partly because of fundamentals, and partly because of hype."
In contrast to other online retails like eToys -- which set up just a web site to sell toys -- Amazon followed a comprehensive strategy. First, it built warehouses; it stacked books, and filled the orders. Second, it launched a shrewd strategy of promotions (discounts and free shipping) that allowed the company to attain economies of scale. Third, it branched out into all sorts of merchandise to attain economies of scope-sometimes by signing up on-line affiliates. Fourth, it expanded into content development business, by partnering with first time authors, and more recently with experienced authors.
And fifth, it jumped into the electronic device market, which provided a vehicle to sell electronic content and other online merchandise.
Amazon's strategy resembles similar strategies that have been deployed for years by large companies to dominate the market, including Standard Oil, the famous monopoly of the 1880s. Amazon has been expanding both horizontally and vertically, raising barriers that keep competition off its turf, as other successful web-based companies have been doing -- including Microsoft (MSFT), Google, and Oracle (ORCL).
This strategy, however, doesn't come without a cost. Two quarters ago, the company missed analysts' earnings estimates, in part because of two reasons: the building of more support centers than previously announced, and the expansion of the kindle production. Yet investors continue to drive Amazon's stock higher. Last quarter, the company missed analyst estimates, again. Yet the stock continued its ascent. That's where the hype comes in, the fuel of all stock bubbles.
What should investors do?
Stay away from the stock until it trades at more reasonable levels.
Disclosure: I am short AMZN.