Amazon’s stock is not overvalued

When it comes to Tech Giants such as Alphabet, Microsoft, Facebook, Apple, and Amazon, one of the false Standard Investment Narrative people sometimes take is that these stocks have run ahead of themselves, that an overly optimistic perspective has been taken and that the high multiples (Price Earning Ratio; PE-Ratio) are not justified.

Well, with regard to Alphabet and Facebook things are pretty clear: at least in the last few years, their Earnings Per Share (EPS) have been growing at a faster pace than their stock prices. So, their PE-Ratios have come down, making their shares even more attractive or so to say “cheaper”.

Now, let’s go to Amazon, which for decades has shown tremendous revenue growth but not profits. Well, that situation has changed dramatically and you see the same pattern as Facebook and Alphabet have shown in the last few years: in terms PE-Ratio, Amazon is getting “cheaper” and “cheaper”.

That seems counterintuitive when you look at the steep rise of Amazon’s stock. Right?

Don’t be mistaken. Please don’t focus on the stock price but on the fundamentals. Amazon’s financial results speak for themselves.

Amazon’s PE-Ratio is dropping, making the stock even more attractive

Just glancing at a snapshot of the first quarterly report 2021 you can immediately see that Amazon has been able to substantially boost Operating Income from USD 3.989 Bn in the first quarter of 2020 to now USD 8.865 Bn. That’s an increase of more than 100 %.

But even more impressive is the comparison of the company’s Net Income climbing from USD 2.535 Bn in the first quarter of 2020 to USD 8.107 Bn. That’s a Year over Year jump of 300 %.

So, people love to look at multiples. It’s not long ago, that you couldn’t get any PE-Ratio for Amazon due to the fact that this company focused on revenue growth and did not make any profit. Then, Amazon slowly but surely started to become Free Cash Flow positive and you could see a PE-Ratio of around 1000. Now that was really high. But things have changed a lot with Amazon.

Now let’s look at the approximate PE-Ratio as of today. Given a current stock price of around USD 3’500, you can quickly see, that this ratio stands at around 60. Amazon’s EPS for the first quarter of 2021 was at around USD 15 (just think about that: one year ago it was “just” USD 5). Now one can reasonably assume that Amazon will be able to achieve at least USD EPS 15 for each of the next quarters, bringing it to at least USD 60 for the full year. USD 3’500 divided by USD 60 brings you to an extremely conservative approximation of a PE-Ratio of 60.

Why is that an extremely conservative and even unrealistic approximation? Just think about the growth Amazon has shown in the last years. Amazon’s EPS per quarter will steadily rise. In my view, it’s not unrealistic to see the total EPS for 2021 at around USD 80. Well, and here we go: forward PE-Ratio would then be just 44.

Ladies and Gentlemen, Amazon stock today is everything else than overvalued. In fact, it is highly attractive.

Amazon’s economic moat is getting stronger and stronger

Amazon’s strong position in

  • e-commerce
  • cloud computing
  • digital streaming
  • artificial intelligence
  • etc.

is breathtaking.

People often tend to focus on the e-commerce and cloud computing part. And they are right, the business is unmatched in these two areas. And yes, AWS accounts for the lion part of Amazon’s profitability and growth of operating income. And people are exactly right, AWS is not only extremely profitable but also scalable.

But just let’s take Amazon’s advertising business for instance. In my view, it’s equally attractive. It accounts for roughly 50 % of the AWS revenue contribution but comparing to the last few years, it’s growing at an even stronger pace, two times faster, to be exact. So, the advertising business with its high margins and growth rate potential of at least 50 % annually not only will contribute handsomely to Amazon’s bottom line, but contributes to the strengthening of the overall company’s ecosystem.

Amazon’s business model stands on the strong foundation of so many growing platforms, ranging from online shopping to AWS, to Prime Video, Fire TV and so much more.

And it does not stop there. Amazon also owns warrants and future rights in other companies which is tremendous value with regard for the future.

So, Amazon shareholders not only have a stake in multiple growing segments but indirectly invest in attractive business ventures. And all that on the back of a cash printing machine that has excellent financial fundamentals. Amazon’s key strength is its customer-focus and long-term oriented business thinking which it merits from its founder Jeff Bezos who without any doubt is one of the most important and best entrepreneurs that have ever lived.

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

About Savy Fox

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2 comments

  1. Great article ! Indeed there was a post of Morningstar yesterday mentioning that Amazon (AMZN) was undervalued, rated ⭐⭐⭐⭐. It’s an amazing growth stock, they should do a split to be able to buy more shares easily at a cheaper cheap still. 👍😀

    • Absolutely! Amazon’s profits have been growing faster than its stock price for some time, and in 2020 EPS took a huge leap. What I like in particular is the strong FCF generation. Amazon will continue to grow organically like crazy plus acquire businesses along the way, integrate them and diversify its business further.
      Today, the stock price sits at around USD 3’200 and I agree, splitting the stock would make it more affordable and attractive.
      I appreciate you stopping by and commenting.
      All the best and happy investing.
      Cheers

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