If you are long Amazon.com (AMZN) shares you are probably pretty disappointed by today’s price action in your stock. The online retailing giant reported a very strong fourth quarter last night and predicted first quarter sales above estimates. And for that you get a stock dropping 4 percent in pre-market trading.
The Amazon story isn’t always about financial results. It reminds us that investing isn’t about picking stocks that will beat their numbers, but rather about picking stocks that are undervalued relative to what their results will be. With shares of Amazon trading at 57 times 2007 profit estimates, even a strong earnings report is already priced into the company’s shares.
Until the multiple comes down, or Amazon’s margins expand like the bulls on the stock think they eventually can, the shares as an investment are going to be disappointing. Strong sales are one thing, but on Wall Street it’s all about earnings and multiples of those earnings.
Full Disclosure: Short shares of AMZN at time of writing