Company Profiles

Amazon.com's Market Value Nears $500 Billion

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Founded in 1994, Amazon went public in May 1997 with an IPO value of $660 million. Above, the Amazon corp office in Seattle.

Amazon seeks to become the seventh American company to eclipse $500 million in market value even though revenue has not grown nearly as fast.

Amazon.com, the world's largest online retailer founded in 1994 by Jeffrey Bezos, is poised to become only the seventh company in American business history to achieve a market capitalization of $500 billion.  Microsoft was the first in 1999 followed by Cisco Systems, Intel and General Electric a year later.  More recently, Exxon Mobil and Apple have manged to surpassed the lofty milestone. As of June 30, 2017 Amazon's market cap stood at $463 billion.

Market capitalization, which is a company's stock price multiplied by total outstanding shares, is an important measurment that represents the market valuation of a company.  When compared to revenue, a major indicator of size, the market cap tells you how a company stacks up in the eyes of investors as, theoretically, a company's market valuation should be in proportion to its size. 

If Amazon reaches the $500 billion mark it will have achieved the milestone with about the same amount of sales revenue as Apple when it reached that milestone in 2012 but much less than Exxon Mobil who made it in 2007.  In 2016, Amazon had a market cap of $334 billion as of June 30th and sales of $136 billion for a market cap-to-revenue ratio of 2.34.  By comparison, Apple broke the barrior with sales revenue of $156 billion and Exxon Mobil's 2007 sales were $405 billion.

In 2006, Amazon's market valuation was only slightly higher than its sales revenue as the company's market cap to revenue ratio was 1.13.  In the years that followed, however, Amazon's market cap to revenue ratio steadily climbed to a level of 1.75 in 2014.  In the past three years, Amazon's market valuation has really soared climbing from $203 billion in mid-2015 to $463 billion by mid 2017 much higher than revenue, as the accompanying graph illustrates.

Reaching a market cap of half of trillion dollars is an astonishing feat for a company that started out as an online bookseller with very little assets, huge double-digit losses and what many considered a questionable strategy.  But since the beginning, investors have flocked to the company that keeps finding new ways to generate revenue.  As Bezos himself said in a Wall Street Journal article in 1997, "our investors support our strategy." 

Investor Guided

Indeed, from the very beginning, Amazon has been an investor guided company.  Historically, most companies have focused on generating sales and profits before concerning themselves with the often fickle world of investor. Amazon did just the opposite.  Bezos, a former Wall Street computer wiz, actively sought investment capital early taking Amazon public only three yeas after its founding.  Then, rather than use sales and profits to generate equity capital, he used equity capital to generate sales but no profits. 

In 1996, Amazon had sales of $16 million with a loss of $5.8 million or 36.9 percent.  In May of the following year, the company went public by listing on the Nasdaq with an initial public offering (IPO) that raised $660 million.  By the end of 1997, Amazon's sales had reached $148 million, an 841 percent increase from the previous year.  It's loss narrowed but was still high at 18.7 percent.  More signficantly, the company's market cap was 4.06 times annual revenue. 

One reason for the high market valuation compared to revenue was a throng of investment analysts who quickly became Amazon's biggest cheerleaders.  "This company is very effective retailer of books and audio tapes," said Les Levi, a telecommunications analyst at Chase Securities in May 1998.  But none were bigger than Lise Buyer, an analyst at Deutsche Morgan Grenfell.  "They're already down the learning curve.  Now, they're entering the realm of music, which is a great strategy."

From that point forward, with a captivated analyst community, Bezos craftily used the capital from eager investors to branch out from book selling to music and other forms of retail to where today just about anything can be purchased on Amazon.com.