There is nothing like a big round number to get the pundits – and critics – excited about a stock. However, despite all the hype, we remain extremely bullish on Amazon.com Inc. (Nasdaq: AMZN) for long-term investors, those who are going to buy Amazon stock and hold it for five to 10 years at a time.
The Amazon stock price joined Wall Street’s exclusive “$1,000 club” early on Tuesday (May 30), touching $1,001.20 before closing at $996.70. Not a bad run for a stock that debuted at $18 per share in 1997.
[ad#Google Adsense 336×280-IA]And now it is one of only a handful of stocks that traded at four-digit price levels in today’s marketplace.
The Standard & Poor’s 500 only has one other $1,000 club member, Priceline Group Inc. (Nasdaq: PCLN). Google parent Alphabet Inc. (Nasdaq: GOOGL) is getting close, trading near $990 today.
But what does $1,000 really mean? Of the highest-priced stocks that trade today, there is one theme.
None of them have split their stock to bring share prices down to levels accessible to smaller investors.
You see, if a company splits its share price “two for one,” holders will have twice as many shares. But the price of each share is half the price of what it was before. The market value of the company stays exactly the same. Therefore, there is no valuation mystique over the $1,000 mark.
What is far more important is how much the company earns, its pace of innovation, and where it stands relative to the competition.
And that is where Amazon really shines…
If we look at the widely followed measure of a stock’s value, its price/earnings ratio (P/E), we might be hesitant to buy Amazon at current prices.
However, Money Morning Chief Investment Strategist Keith Fitz-Gerald explained to readers in April that while Amazon may be considered expensive by these traditional measures, you can’t look at stocks like Amazon through traditional lenses.
Here’s why Amazon stock remains one of the best buys on the market for long-term investors…
Why Amazon Stock Remains a Buy
Amazon bears frequently point to the fact that Amazon trades at a P/E of 185. By conventional metrics, that is extremely expensive.
But Amazon is not a conventional company, and the conventional metrics often used to judge overall market conditions and the relative attractiveness of specific stocks don’t apply. Research actually shows that P/E ratios have very little predictive value when it comes to identifying the most successful investments.
And how many times has a friend told you that they were not investing because the market was “too high”?
It is understandable that high prices make us hesitant. However, great stocks tend to keep moving higher. Sure, there are bumps along the way and even the occasional bear market. But if you are a long-term investor, you can be assured that a great business and a great company will likely bounce back.
Look at Amazon’s competitive position. Unlike a manufacturer, Amazon can add a million customers at the click of a button or by merely releasing a few lines of code. That means it can grow into the “P” – price – while expanding the “E” – earnings. Other retailers can only dream of having Amazon’s reach, recognition, and integration.
Amazon stock has soared thanks to strong results from its core retail business. And as if to “stick it” to the brick-and-mortar retailers it is putting out of business, it is even opening physical stores, including one in Manhattan recently. Add a booming cloud-computing business and new initiatives into media, and we’ve got a modern juggernaut.
The company is also not held hostage to the shenanigans and dysfunction in Washington. Tax reform is less of a concern as the company focuses on growing international operations. Repatriation, or bringing cash back from overseas, would likely not interest it. And lower taxes for a company that is less interested in short-term profits than long-term market share and domination are also not that attractive.
In short, Amazon is its own boss and free to power ahead in ways that would bankrupt a lesser company.
If you’re worried about the high share price, Keith recommends buying just a few shares at a time.
Owning a few shares of one of the market’s premier names is better than owning none at all. And if the price does dip in the short term, you will be able to buy more shares. But no matter how you do it, Amazon is a stock with a bright future.
— Money Morning Staff
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Source: Money Morning