Amazon stock price is up 114% year to date despite net income coming in lower ($79 million) than the second quarter of this year ($92 million). In fact net income totals have been in the red twice over the last five quarters which have many Amazon bears convinced that over time this stock will ultimately go lower. However in my opinion value investors place too much importance on price to earnings ratios and EPS growth especially for growth stocks such as Amazon. Do you think an shareholder cares if this company keeps on reporting quarterly losses going forward especially when we see the share price up almost 300% since 2012? What matters on Wall Street is top line growth levels (revenue, gross margin, etc) but more importantly the future drivers of this growth. If you have these two components, the respective stock will keep on rallying irrespective of bottom line figures. Amazon (AMZN) stock has huge growth drivers in areas such as “Amazon Web Services (AWS)” where growth rates are accelerating, “Amazon Prime” which continue to offer big discounts and faster delivery times and “International Expansionary efforts” which are ongoing mainly in Europe and China.
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Furthermore Amazon stock is being aided on Wall Street by the growing e-commerce trend which is easy to see in competitor Alibaba (NYSE:BABA) numbers which grew its top line by a huge $770 million last quarter compared to Q3 2014. The growth drivers are certainly there, which is why Amazons stock commands a high premium. Twitter (NYSE:TWTR) (another potential growth stock) doesn’t have the perceived growth drivers Amazon has. Despite having the top line growth, Wall Street has taken a bearish stance on this stock due to its sluggish user growth which could turn into an opportunity going forward if Twitter can convince Wall Street that its growth drivers are back. Amazon on the other hand has no such troubles with growth drivers but with expectation. The higher Amazon stock goes, the more risk will definitely enter the equation. Let’s discuss some areas where it needs to keep its foot to the floor so its valuation can be justified.
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