Amazon and Apple: The Myth of the Rational Market?

Can anybody explain this to me?

That’s a 20:1 ratio.

Yes, Amazon has a lower price to revenues ratio, by a 2:1 margin.

And presumably at some point Amazon can turn the prices-versus-market-share dial away from gaining market share/maximizing revenue and toward price and profits. Say they manage a 1% across-the-board price increase with no decrease in their roughly $50 billion in 2011 sales. That would add about $500 million to their $643 million in 2011 after-tax profits — a 77% increase.

That’s a pretty nice jump, but can they do it more than once?

And: assuming Amazon’s stock price remains unchanged, their profits have to grow by 1900% to match Apple’s current PE ratio (which is also about what we’ve seen as a historical average ratio for U.S. equities in general).

Sure, we’ve been seeing 55-65% annual revenue growth from Amazon (excepting 2009), but at a steady 50% revenue growth rate it’s going to take them something like seven years to match Apple’s PE at the current Amazon share price, based on revenue growth alone. How confident does anyone feel in predicting that future?

Will Amazon have a trillion dollars in revenues seven years from now? Apple’s 2011 revenues were $108 billion…

Shortly after Amazon IPOed in the 90s I did the same kind of back-of-the-envelope calc, and realized that if they had $10 billion in sales — a 10x increase at the time — the stock price might be reasonable. It took them almost a decade get there — just to get to what would have been “reasonable” ten years earlier. This has been going on for a very long time.

Is this time different?

Full disclosure: I’m long Apple. And I do most of my shopping on Amazon. Many thanks to all those Amazon share purchasers who have subsidized my lavish lifestyle.

Cross-posted at Angry Bear.