How Much Would You Pay for Mighty Amazon.com Inc (AMZN)?

Building on the experience of running its enormous Web operations a with high level of Internet data support and information processing, Amazon has emerged as a major player in cloud service and data center management. In addition to self-supplying networking capability to power its own websites, Amazon also provides data storage and hosting services to other companies. The business involves physically setting up large-scale servers and other network equipment in different places, and thus requires intensive capital investments. Depending on the demand for its data services, fees earned may take years to pay back capital outlays, a potential drag on Amazon’s profitability in the interim.

In comparison, Apple and Google are more profitable companies. Built around its devices, Apple’s business is more concentrated than Amazon’s sprawling undertakings. Apple makes money when a device is sold, and again makes money when the same device is used as a platform by third-parties as an application-launch pad. Unlike Amazon selling its Kindel device as a lure for customers to buy its other services, Apple has all the intention to earn as much profit as possible from every device it sells. Google has also been able to maintain a wider operating profit margin than Amazon–above 30 percent in four of the last five years. Google’s steady focus on increasing earnings from ad sales is an unstated driving force behind its continually introducing new tools and services.

Many consumers are careful not to overpay for goods or services, but oddly enough fewer investors are concerned about overvaluing an investment. It’s true that an overvalued investment may not lose its nominal value for some time and can even earn investors high returns as long as it is still attracting continued overvaluation from other investors. But it can be a risky bet to rely on others’ unpredictable behaviors rather than a business’ fundamental performance. At its current valuation, it might be just a hefty price to pay for even the mighty Amazon.

The article How Much Would You Pay for Mighty Amazon? originally appeared on Fool.com.

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