Can Amazon Deliver on Its Valuation?

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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

More solid news on the earnings front from and other blue chips has stocks opening slightly higher this morning. The S&P 500 and the narrower, price-weighted Dow Jones Industrial Average are up 0.14% and 0.15%, respectively, at 10:15 a.m. EDT.

Yesterday, I highlighted two large-capitalization technology stocks that look like values hiding in plain sight. Today, I took a look at two large-cap tech stocks in the news with valuations that look stretched.

More than a decade after the end of the dot-com bubble, survivor Amazon  has thrived, becoming the dominant player in e-commerce and branching out into Web services and mobile devices. However, it remains in a "build-out" phase that appears to ignore profitability. For now, investors continue to cheer this strategy: This morning, they are pushing the stock up 9.6% in response to the company's third-quarter results, which were released after yesterday's close.

No question about it -- Amazon's growth is impressive: Revenue jumped 24% year over year to $17.1 billion, beating Wall Street's $16.8 billion estimate. North America led the way, notching a 31% increase. CEO Jeff Bezos indicated that Amazon Prime, which provides users with unlimited free shipping for a $79 annual fee, was instrumental in boosting revenue growth, adding that the company "had signed up millions of new Prime members" over the past 90 days.

Amazon posted a net loss of $41 million in the quarter, down from a $274 million loss in the year-ago period. The latest loss was partially fueled by huge investments in fulfillment (i.e., warehouses), technology, and content -- items investors will tolerate (for now, in any case) as Amazon seeks to redefine the standard for e-commerce to same-day deliveries.

As for Amazon's valuation -- 151 times the next 12 months' earnings-per-share estimate -- it certainly ought to give value-conscious investors pause. In truth, however, that figure isn't particularly helpful, as the earnings estimate on which it is based doesn't give any hint regarding what the company could earn once it matures beyond its build-out phase. While I'd think twice before buying the shares at this level, I wouldn't bet against a company led by a visionary CEO that is remaking the retail landscape here and abroad.

When it comes to stocks with eyebrow-raising multiples, I wouldn't touch Tesla Motors with a 10-foot pole. The stock's 12-month forward EPS multiple of 181 translates to a market capitalization of $21 billion -- roughly two-fifths of General Motors' . To put that number in perspective, Tesla Motors expects to sell 21,000 cars this year, so the company is now valued at $1 million per unit of sales ; by comparison, General Motors sold more than 9 million vehicles last year.

You needn't listen to me regarding the stock's overvaluation. In an admission that echoed that of Netflix CEO Reed Hastings earlier this week, Tesla Motors CEO Elon Musk had the honesty to say, "I think that we have quite a high valuation, and a higher valuation than we have any right to deserve." Buyer beware!

Amazon is redefining retail -- and two other companies are doing the same
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

The article Can Amazon Deliver on Its Valuation? originally appeared on

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends and Tesla Motors. The Motley Fool owns shares of and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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