Ironically, Amazon Profits By Perpetuating Stock Bubble Myth

Published Friday, February 12, 2021 at: 8:02 PM EST

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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.

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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.

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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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