The April 25, 2012, edition of the Wall Street Journal contains an article by Spencer Jakab entitled “Amazon’s Valuation Is Hard to Justify.”
Read the article and answer the following questions.
(a) Explain what is meant by the statement that “On a split-adjusted basis, today’s share price is the equivalent of $1,166.”
(b) The article says that Amazon.com nearly doubled its capital spending on items such as fulfillment centers (sophisticated warehouses where it finds, packages, and ships goods to customers).
Discuss the implications that this spending would have on the company’s return on assets in the short-term and in the long-term.
(c) How does Amazon’s P-E ratio compare to that of Apple, Netflix, and Wal-Mart? What does this suggest about investors’ expectations about Amazon’s future earnings?
(d) What factor does the article cite as a possible hurdle that might reduce Amazon’s ability to raise its operating margin back to previous levels?