Weekly Investment Update
Ironically, Amazon Profits By Perpetuating Stock Bubble Myth
Published Friday, February 12, 2021 at: 8:02 PM EST
With fears of a stock market bubble spreading, sweatshirts and tee shirts on Amazon Prime depict Federal Reserve chairman Jerome Powell in priestly garb holding a book proclaiming the “recession cancelled” and “stocks only go up.” Fashionable perhaps with the crowd on the r/WallStreetBets Reddit thread where it surfaced, the clothes, ironically, do not fit in with financial reality.
This table shows different measurements of the “bubbleness” of the largest 10 companies in the Standard & Poor’s 500, ranked by market capitalization. (Market-cap is the number of shares of a company available to be purchased by the public multiplied by the company’s share price.)
By traditional measures, some of these important stocks look expensive, playing into the fears of a bubble. For example, Amazon was recently priced to trade at 73.7 times its expected earnings in 2021. To be fair, that is about 300% higher than the valuation place on expected earnings of the average company in the S&P 500 index. However, Amazon is expecting 2021 earnings will be 60% higher than its 2020 earnings! That’s astonishing earnings growth! It justifies a high p/e.
Moreover, Amazon’s PEG ratio, a valuation metric that factors in expected growth, is 1.2. A PEG ratio of 1.0 represents a perfect correlation between a company's market value and its projected earnings growth. So the 1.2 PEG ratio is reasonable.
It is ironic that you can buy a shirt on Amazon spreading the bubble myth.
The Standard & Poor’s 500 stock index closed Friday at an all time high of 3,934.83. The index gained +0.47% from Thursday and is up +1.22% since last Friday’s record-breaking closing price. The index is up +55% from the March 23rd bear market low.
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