Amazon.com, Inc. (NASDAQ: AMZN) shares have lagged the S&P 500 in 2021, generating a year-to-date total return of 4.7%.
Amazon is still putting up impressive growth numbers. But with a $1.72 trillion market cap, some investors are wondering if there’s any value left in Amazon stock.
Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 34.6, more than double its long-term average of 15.9.
Amazon’s PE is currently 58.9. That number is well above the S&P 500 average as a whole. However, Amazon’s PE is actually down 23.7% over the past five years, suggesting its earnings multiple is on the low end of its historical range.
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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.7. Unfortunately, Amazon’s forward earnings multiple of 50.4 is about 150% higher than the S&P 500 as a whole and makes Amazon stock look relatively overvalued. It’s even roughly 150% higher than its consumer cyclical sector peers that are averaging a 20.2 forward earnings multiple.
However, when it comes to evaluating a stock, earnings aren't everything.
Growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 1; Amazon’s PEG is 1.65, a relatively attractive valuation for a megacap tech stock.
Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.1, nearly twice its long-term average of 1.62. Amazon’s PS ratio is 3.8, not exactly a bargain value but relatively in-line with the market as a whole.
Finally, Wall Street analysts see impressive gains for Amazon shares over the next 12 months. The average analyst price target among the 43 analysts covering Amazon is $4,105, suggesting about 20.3% upside from current levels.
The Verdict: At its current price, Amazon stock appears to be overvalued based on earnings alone, but after factoring in its impressive growth numbers the stock seems appropriately valued at today’s prices.
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