Don't Underestimate Amazon

Amazon trades at a P/E ratio well into the triple digits. But it's not as high as you'd think.

When traditional bricks-and-mortar places like Wal-Mart, Best Buy, and Target grow, they spend on new stores. These capital expenditures don't hit the income statement and thus don't affect earnings until depreciation kicks in. What folks sometimes miss about Amazon is that its growth is largely on the income statement. Instead of stores, it's spending its money on things like subsidizing shipping to get goods to customers faster and subsidizing the price of its Kindles (to get customers into its media ecosystem). These are short-term earnings hits with long-term potential for the business.

Fool analyst Anand Chokkavelu explains in the video below.

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Anand Chokkavelu owns shares of Best Buy. Andrew Tonner has no positions in the stocks mentioned above. The Motley Fool owns shares of and Best Buy. Motley Fool newsletter services recommend 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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