There are strong and divergent views on what Amazon.com, Inc. (NASDAQ:AMZN) stock price is truly worth. Perhaps only Apple can match the emotional attachment that many investors have towards Amazon. You either love Amazon or you hate it. You either think it’s insanely overvalued or you believe it’s the greatest stock to own in the history of mankind. However, I ask that you carefully consider the first sentence in the above quote: “A company’s value is a function of what someone is willing to pay for it.” As a long time value investor, I have had this phrase thrown in my face many times over the years. Now the truth is, anything and everything in this world is only worth what someone else is currently willing to pay you for it.
However, that statement does not define intrinsic value, instead, it defines current market value. Nevertheless, if you are absolutely required or forced out of necessity to liquidate an asset, it is only worth what the market will bring at that moment in time. In order to put this into perspective, let’s go ahead and review the historical performance of Amazon since December 31, 2001.
Had you had the foresight or luck to invest $10,000 in Amazon on that day and held it until yesterday’s close, that $10,000 investment would be worth more than $1,333,000. The same investment made on exactly the same day in the S&P 500 index would have only turned $10,000 into a little more than $27,000. Rhetorical question: would you rather have $27,000 in the bank or $1,333,000?
Okay, here is the inarguable point. Had you bought Amazon on December 31, 2001 just as the recession was coming to an end and sold at yesterday’s close you would be a millionaire today. That is real shareholder value, real actual results, and based on the definition stated above the real worth of Amazon to that shareholder. No philosophical debates can alter the factual reality of that transaction as described. Amazon was worth over $1 million to that investor – period – end of discussion and I’m done talking about it.
However, that logic only truly applies if you are forced or required to sell or liquidate your holdings. If not, you can simply hold on until your estimation of intrinsic value is inevitably realized. To summarize, there is a difference between intrinsic value and current market value. Sometimes that difference can be huge and at other times small. But in the real world, your investment will only sell for what the market is willing to pay at that moment. Therefore, at that precise moment in time, your stock was worth exactly what the other party was willing to pay you – nothing more, nothing less.
On the other hand, long-term investors planning for the future are not required to sell today. Instead, they are more concerned with what they believe the stock they are purchasing will be worth in the distant future. Therefore, they require strategies, skills and tools to help them ascertain what the future value of their stock will be and what rate of return that would represent to them.
As I previously indicated, Amazon has attracted both adoring and zealous fans and deriders regarding its stock price and current valuation. In the following video I will take a by-the-numbers fundamental look at Amazon, its growth and its fiscal strength. As an aside, there have been recent articles challenging whether Amazon is reporting free cash flow correctly or not. I will be elaborating on that subject in the video portion of this article.
