A generational shift is taking place that will dramatically alter tomorrow’s business landscape. Artificial intelligence and machine learning are not, in and of themselves over-hyped word combinations, but rather one milestone in what is shaping up to be a new business construct. At the center of this brave new world is Amazon, a firm that not only boasts a historically high price / earnings ratio, but also a business model that defies traditional categorization. Noting that society is in the “midst of a generational shift in consumer behavior” which comes with a new distribution model, AB Bernstein’s U.S. Consumer research team notes “only thing one can be certain about.” The only certainty is change and disruption. In this regard, the praise is high: “When it comes to disruption there has never been a company quite like Amazon.” But how long will Wall Street’s long leash of a P/E ratio last with Amazon Apocalypse consuming all rivals ?

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Is Amazon's 287 P/E ratio proof that value investing is dead?

Hedge fund manager David Einhorn has long been skeptical of the Amazon Apocalypse killing retail. When the founder of Greenlight Capital was reported to have returned 6.2% in the third quarter, he lit into momentum stocks such as Amazon and Tesla, both new world benchmarks.

"Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value," he wrote in a recent investment letter reported by CNBC. "What if equity value has nothing to do with current or future profits and instead is derived from a company's ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?"

With Amazon stock up near 30% year to date, a component of the viability upon which Amazon has been questioned is the P/E ratio, a traditional measure of value. Currently at 287.31, the expected earnings to justify such a historically lofty level are themselves abnormally high, particularly given that Kroger is trading at 13.46 P/E and Walmart is trading at 22.09.

The bottom line valuation liberalism might not last. According to Zacks investment analysis, Wall Street’s expected P/E ratio for Amazon is expected to drop nearly in half by 2018, to 137.74 and then drop again to 74.82 in 2019. In other words, as the world of quantitative easing is ending, Wall Street may once again hold corporations accountable to more tangible earnings.

If Zacks models are accurate, the question becomes: Can Amazon disrupt the world and beat the clock on Wall Street’s growing P/E demands?

The ability to compete on price is a benefit given to Amazon Apocalypse by Wall Street's lax P/E ratio, which is likely to impact pharmacy market more than off-priced retailers

Amazon is in the middle of redefining not just the business models of retailers, but of all industry. They are a technology company placing a blanket of disruption over a wide variety of industries and being held to a different financial standard to compete on cost.

Cost is a primary driver of its disruptive force, Bernstein wrote, pointing to a change in how consumers view brand loyalty as less important being among the disruptors.

To Bernstein, this creates winners and losers. Thus far, off-price retail has been a relative winner, a fact evident by the fact the e-commerce giant is under-represented in apparel relative to overall e-commerce, the report noted, pointing to a business model of direct partnerships with brands and curated assortments winning the day.

Where Amazon is most immediately likely to target is the pharmacy industry, which “is ripe for disruption” due to retail fragmentation, cost inefficiencies, and a general lack of price transparency in prescriptions, according to Bernstein.

Beverage and snack companies will do better than household and personal care companies as the Amazon effect takes over. Large corporations who can compete on price, such as Walmart, are expected to fare better than smaller retailers, the report noted.

The big question is: How much leeway is Wall Street willing to given Amazon to compete on price at levels traditional corporations can’t match?


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