This is an important point. The stock market doesn't try to reward companies with higher share prices, it tries to find the correct price and stabilize there.

If your company is expected to do well, that performance is already built into your stock price. Doing exactly as well as expected, even if you've doubled your profits, won't cause your share prices to change at all. Because everyone already expected you to do that, so they were willing to pay more money to own your stock even before the official news.

The only thing that changes the stock market drastically is a surprise.

What about uncertainty? Surely the removal of uncertainty would cause a movement in the price even when a company performs exactly as predicted?

No. Imagine a coin flip where you earn $1.1 on head and lose $1 on tail. What is the value of such a flip? $0.05

Now I offer you a coin flip with less uncertainty. It earns you $0.6 on head and loses you $0.5 on tail. Would you pay more then $0.05 for it? No. Uncertainty was reduced, but no value was created.

This assumes that people operate only on expected value and don't care about variance at all, which is incorrect empirically, theoretically, and intuitively. The premium you pay for reducing variance is called a "risk premium", and it follows pretty trivially from the diminishing marginal utility of money (though there are many other ways to derive/explain it). This is the entire reason that insurance exists as a product: it's not designed solely to cover existential risks or to prey on the irrational.

Well, if you pay me more then $0.05 for the $0.6/-$0.5 coin flip, I will happily sell you some. How much do you want?

I think GP disagreed with your assumption that a $1.1/-$1 coin flip was worth $0.05, so they'd pay more for the $0.6/-$0.5 coin flip than for the $1.1/-$1 flip, but still less than $0.05.

If that is true, then I will happily buy $1.1/-$1 flips for $0.049 from them!

They would pay a premium to avoid uncertainty, so they wouldn't accept that offer either. The uncertainty is the same whether you sell or buy the flips. I don't know you, but I guess you wouldn't pay $499K for a $1M/$0 flip, and you wouldn't sell such a flip for $499K either. This is the same phenomenon on a much smaller scale.

    I guess you wouldn't pay $499K for a $1M/$0 flip

No. But the discussion here is about shares. And they are not $499k a piece.

We are discussing if the share price of a company that publishes numbers in line with expectations should go up.

What do you mean by “expectations”? If Amazon trades a $2000, is the expectation that it will stay at $2000 forever? Or is the expectation that will go up because it will surpass expectations?

If by expectations we mean the numbers published by sell-side analysts they may or may not be close to the actual market expectations.

Say you can pay $10k and get (50/50) either $0 or $22k. The expected gain is $1k.

A second game also costs $10k to enter, but the (50/50) payouts are $9k and $13k.

Do you find then equally attractive? Most people wouldn’t.

If you do, what if you could instead “play” a game where you pay $10,000 and get $10,999 straight away? It’s a worse proposition if you’re risk-neutral, isn’t it?

And while it’s true that if markets were efficient you wouldn’t be compensated for diversifiable risk it’s also true that a) markets are not efficient and b) uncertainty in the results of companies is correlated with the market and not completely diversifiable.

Some funds are sufficiently large/diversified to avoid worrying about uncertainty in a single stock. If someone cared about this uncertainty, they would already have sold their shares to these funds before, so the reduction of uncertainty would have a negligible impact on share price.

Price/Sales is 4.01, lower than GOOG, FB or MSFT. They are going for growth, not profit. No valuation metric is perfect, but P/E is particularly useless for this company.

A huge part of Amazon's business is retail where it never is going to have the same margins as any of the tech companies you listed. It's not really useful to compare Price/Sales in those contexts.

Comparing their price to sales ratio with that of companies in different businesses doesn’t make much sense either.

P/E is NEVER useless. For instance, if a company misses on earnings, then maybe it was an outlier - an odd quarter of sorts. But if you do it a few times over, then you are not the growth company you thought you were, and your 100:1 p/e will come crashing down to join everybody else (albeit maybe on the high side) somewhere in the upper 20’s or in the 30’s.

But here’s the key - to do that, a stock would have to lose TWO THIRDS of it’s value.

So a really high p/e signals really high growth expectations, and when a company isn’t growing at that expectation, the law of gravity again takes control and it will fall back to earth.

Ignore it at your own peril.

But you are assuming that the end goal of the company and purpose of buying the stock is to participate in "earnings" in the form of dividends.

But that is no longer the MO of many public companies now.

The goal appears to just eternally grow the stock price and allow share holders to cash out in the form of appreciated shares which get a preferable capital gains tax treatment.

Occasional earnings are just there to prove to the market that you could make money if you wanted to. Amazon has never paid dividends and probably never will unless their shareholders are able to convince them otherwise.

To take it even further, there are additional tax advantages to capital appreciation for the wealthy that hold Amazon stock. They can even choose not to sell appreciated stock but instead get low interest loans using their stock as collateral.

Buy stock - let it appreciate - increase your line of credit - live off the borrowed money that has a lower interest rate than the stock price growth rate - continue until death - let estate sell the stock and take a one time tax hit.

You are the one conflating dividends and earnings. Even if a company chooses to reinvest retained earnings instead of returning cash to investors [1] it’s good to be profitable. Not just “to prove that you could”, but to avoid being just a money-burning machine (not Amazon’s case, mind you; they do not have “occasional earnings”, they’ve been consistenly profitable for the last 15 years).

[1] Either through dividends or through buybacks. The second option has some advantages relative to dividends and results in capital gains for the investors that choose to sell.

First, capital gains and dividends have basically the same tax treatment (not identical, but close enough for anyone holding for longer than a year).

Second, a company’s market capitalization can only grow in one of two ways: increase in the P/E ratio, or increase in earnings. Of the two, the latter is more sustainable, and less susceptible to market downturns.

Dividends are just the percentage of earnings a company pays out to its shareholders for various reasons (I’ll skip the myriad of reasons for brevity).

The best measure of sustainable value creation is ROIC (Return On Invested Capital). Most people don’t use it because it’s not a readily available statistic and it’s not easy to calculate. But for the long term, I don’t know of anything better. Still, p/e is important.

>First, capital gains and dividends have basically the same tax treatment (not identical, but close enough for anyone holding for longer than a year).

No, that's not correct. If you are being paid a dividend, whether it be qualified or not, that money is double taxed. Once at the corporate earnings rate and then again to you personally at capital gains rate.

As a shareholder, whether that tax all comes out of your pocket or not, doesn't matter. Your increase in value is effectively taxed at 60-70%.

But that is not the case if the company you invest in, rather than retaining earnings to pay dividends, reinvests into growth or other capital expenditures or keeps large sums of untaxed money in overseas accounts. Thus continually pushing the stock upwards. And allowing investors to make their own choices about cashing out. Be it by selling shares of getting loans using the stock as collateral.

Why in the world do you think Apple has $250B in cash, a full quarter of their total market cap, mostly stashed away in tax free zones?

It is for the simple reason that people can invest and get that money reinvested for them all without ever having to sell or take a distribution and then get taxed before using it or reinvesting it yourself.

Go back and read what I said. Better yet, read Schwab’s tax summary here: https://www.schwab.com/public/schwab/investing/retirement_an...

My statement is correct.

I think you need to re-read what I wrote. You are correct that your personal rate is similar for dividends vs capital gains.

But you are iggiring the bigger picture that dividends money had to be taxed on the corporate side before it was given to you.

Capital gains that are propped up by huge cash stores in overseas tax free accounts are not.

P/S is also hard to use unless you did that for just AWS. Better to look at price to operating cash flow and better yet to capitalize R&D and leases.

PE is used as a comparison, if 10 of your peers are at 15 and you are at 30 you may be over priced or the expectations are sky high for you to grow beyond expectations

Amazon and e.g Google are not peers. The vast majority of Amazons business is retail, not tech.

That's up for debate. Of the revenues that are reported under Amazon retail, a significant portion (some estimates say way more than half) are fees collected from 3rd party sellers using both the online platform and physical warehousing services.

I would argue that portion of their retail revenue is much closer to tech than retail, considering the margins are comparable to tech companies.

PEG

EDIT: https://en.wikipedia.org/wiki/PEG_ratio

They're not a Startup, they've been "going for growth" for a 1/4 of a century, eventually you need to make a profit to justify your Market Cap. Just because profit isn't a goal for AMZN doesn't mean it's not a vital financial metric.

Revenue is up 20% year over year. The growth is real, not just a goal.

Only 20% is why the stock is down after hours, at 100 P/E AMZN is speculatively priced where they're expected to achieve infinite growth until they deliver financials that justify their valuation which Investors are betting on to happen before they hit any growth ceiling. There's also no room for an economy downturn which expensive stocks like AMZN are extremely volatile to.

Growing 20% at Amazon's size is why the stock is worth so much. Almost all companies have slowed down long before this point. Amazon is still growing like a late stage startup. It's really a remarkable feat.

Are Facebook, Google, Microsoft also still considered late stage Startups?

   FB Growth 28% YoY, P/E 26.51, Mkt Cap 573B
   GOOG Growth 19% YoY, P/E 25.90, Mkt Cap 788B
   MSFT Growth 12%, P/E 27.69, Mkt Cap 1.07T

They all have a much more reasonable P/E. Agreed that it's harder to achieve growth from a massive base, but they're also priced from being able to continue doing so much better than their competitors.

It's pretty meaningless to look at P/E for tech companies and compare it to a retail company.

But for those companies it's also pretty impressive, market beating growth.

> It's pretty meaningless to look at P/E for tech companies and compare it to a retail company.

Tech stocks usually have higher P/E's than retailers, but for comparison here are the P/E Ratios of the world's largest retailers:

    WMT 38.8
    COST 34.33
    KG 9.24
    WBA 10.75
    HD 21.73
    TGT 15.39

Yes, but now look at their growth as well and you'll understand Amazon's valuation is not wholly out of line.

> Yes, but now look at their growth as well and you'll understand Amazon's valuation is not wholly out of line.

Then please lay out your understanding of what justifies AMZN's price in your eyes as you've yet to quote a single figure.

The only reason why WMT's P/E is so high (and their Market Cap doubled in since 2016) is because of their success in their e-commerce business which saw 37% growth YoY.

You've been saying AMZN is a retail business whose financials can't be compared to Tech stocks which is clearly untrue, AMZN's retail business is less than 1/2 the size of Walmart yet they're worth 3x more who would've been worth even more if they didn't give out dividends which AMZN can't dream of doing at their current valuation.

It's not untrue, Amazon is largely a retail business and you can't compare it's P/E to tech socks, that'd just be silly. You clearly know enough to know that, so I don't get why you insist.

As for producing the numbers on the YoY for the retail companies you listed - I hope somebody else does that. I'm busy.

AWS accounts for their largest profits, growth and margins, their financials would be even worse if you compared them against retail stocks which are high capital intensive and low margin businesses, there's no way AMZN is valued as a retailer which would make their valuation even more insane.

Amazon is valued based on the implicit assumption that Bezos is a Buffet tier investing genius. So far, that assumption has held. The main difference is that Bezos invents new businesses in addition to buying them. Nobody is arguing that retail isn't a big part of their business, but it was only ever meant to be the bootstrap. It's incredibly rare to see such executive and entrepreneurial skill combined in the same individual.

Yes, this is my take on it as well. They're betting he can keep growing at 20% for many years to come, which would be almost unprecedented for a company of that size and age.

You've presented a concise and valid set of statements that argue that a 100 P/E ratio might be expensive, but don't justify calling it insanely expensive.

I don't understand why companies don't just let there stock price fall. This makes no material difference to the operating of the company, right?

Rising stock price is helpful for retaining high value employees that are compensated with stock

I guess. You could just pay them more though.

> I guess. You could just pay them more though.

This is a good idea. Stop the stock game and just pay a set base salary = to comp + stock.

But we can’t do that because that would take all the fun out of seeing part of your potential income fluctuate with the whims and buffoonery of Wall Street.

Shareholders own companies and a rising stock price benefits shareholders who elect the board members that run said company, a falling stock price isn't in anyone's interest who are invested in the company.

It does help with M&A, raising capital, employee stock options + bonuses.

It's rare, but sometimes you'll hear company Investors saying that their stock price is too high, like Zoom's CEO [1].

[1] https://www.bloomberg.com/news/articles/2019-04-18/zoom-vide...

Good point. This is why we need to reduce the amount of control shareholders have over company boards!

You think owners should have no control over what they own?

That ratio is unreliable because of how they invest so much in future growth. Those capital and R&D expenses will not be around forever.

That may turn out to be so in the long term, but it doesn't align with the current ethos of "It's always day one" at Amazon.