Compare Amazon’s forward P/E of 71.96, to Best Buy Co., Inc. (NYSE:BBY)’s forward P/E of only 7.11. When both companies are valued by their projected future earnings, Best Buy costs about one-tenth as much as Amazon. And Amazon’s price-to-book stands at 14.52, more than three times the industry average of 4.34.
Like Netflix, however, Amazon has a great story. In fact, in many ways it’s an even greater story than Netflix’s, since Amazon’s power has been enough to push rivals (like Circuit City and Borders Books) into bankruptcy. And some may say that the aforementioned Best Buy will be the next to fall, since its stores are little more than showrooms for Amazon.
Besides eBay Inc (NASDAQ:EBAY), few other stocks that offer investors the ability to put money to work on the growing trend of online shopping — and that trend still has a ways to go. A demographic shift should, over time, make the typical consumer more comfortable with online shopping, while advances in same-day or next-day shipping should make the option more appealing.
Sometime in the future, Amazon bulls argue, the company will be able to stop spending so much money on investment. When that day comes, patient shareholders should see a tremendous return.
Salesforce.com has long been seen as an expensive stock
Investors have been concerned about Salesforce’s valuation for years. An article in MarketWatch from Sept. 9, 2010 asks, “Has Salesforce.com become too expensive?”
When that article was written, shares of Salesforce traded near $115. It closed Friday at $169.95.
Like Amazon, Salesforce has no P/E ratio. Its forward P/E stands at 87.15. For comparison, competitor Oracle Corporation (NASDAQ:ORCL)’s forward P/E is only 11.83. Its price-to-book is 11.58, more than double the industry average of 4.83.
But again, like Netflix and Amazon, Salesforce offers investors an attractive story. The company’s colorful CEO, Marc Benioff, might be said to be the father of cloud computing. He built his company on it, challenging giants like International Business Machines Corp. (NYSE:IBM), Microsoft Corporation (NASDAQ:MSFT) and Oracle with software solutions delivered over the Internet.
Those investing in Salesforce at current share prices likely see the company as one poised to continue to reinvent the software world, crushing the establishment with cheaper and better alternatives.
Is Buffett missing out?
Just because these stocks are trading at sky-high valuations doesn’t mean that they are due for a correction. As I pointed out, Salesforce has had detractors for years and continues to power higher.
However,Buffett built his fortune on avoiding companies like these: high-flyers trading at excessive valuations. Although their cutting-edge business models might position investors for incredible returns, they also carry a high degree of risk.
To invest in one of these companies is to bet on a certain future: People switching from cable to Netflix, shoppers giving up their real carts for Amazon’s virtual one, and companies opting for Salesforce and its cloud solutions over its established competitors.
In the end, those kind of bets might prove correct. But Buffett didn’t build his $46 billion fortune making them.
The article Warren Buffett Wouldn’t be Caught Dead Owning These Stocks originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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