Tesla, Amazon. Does Profit Matter?

Dear Reader,

In the past rolling year the market capitalization of Amazon has nearly doubled. Amazon is now worth 889 billion USD. That is a staggering amount of money. Amazon is trading at Price-to-Earnings ratio of 229.34. This is basically astonishing. If you buy the whole of Amazon you have to hold it for 229 years to get your money back. Is Amazon overvalued? Yes, it is. Investment banks' research analysts point to the recent increase in the profitability of the company, especially for the second quarter of 2018. But still, Amazon is richly valued.

Tesla is another case in point. The electric car company is on track to lose about more than 2 billion USD in 2018 and is valued at 59 billion USD, more than Ford or General Motors. A pale comparison of the production numbers and profitability of the three companies says that Tesla is many times overvalued.

So what is wrong? Does profit making matter anymore? 

Of course it does. The valuations of these companies are bubbles. Sooner or later they are going to pop. Investment banks' analysts are desperately trying to explain the value of Amazon.com Inc. with growth and new verticals. For Tesla the story is growth and profitability soon. But these were the stories for Amazon or Tesla since 3-4 years. Do not get me wrong. I appreciate being able to buy books on the cheap from Amazon.com. But Amazon has to figure out how to make more money. Amazon Web Services is a good venue. If AWS and cloud services in general continue to grow strongly, Amazon might even live up to the current hype. But still, I regard the company as overvalued. Tesla has 10 billion USD in debt and is burning a lot of cash. If the company does not break even in 2 or 3 years, Tesla's survival as a going concern would be at stake, in my humble opinion.

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Kind regards,
Petar Posledovich