Amazon.com, Inc. (NASDAQ:AMZN) shares have underperformed the S&P 500 in the past year, generating a total return of 0.37%.
Amazon is still putting up impressive growth numbers. But with a $2.33 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 26.1, nearly double its long-term average of 15.9.
Amazon’s PE is currently 61.1. That number is well above the S&P 500 average as a whole. However, Amazon’s PE is actually down 62.8% 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 20.8. Unfortunately, Amazon’s forward earnings multiple of 60.1 is about 200% higher than the S&P 500 as a whole and makes Amazon stock look relatively overvalued. It's even roughly 100% higher than its consumer cyclical sector peers that are averaging a 30.6 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 1.7, 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 3.14, nearly twice its long-term average of 1.65. Amazon’s PS ratio is 3.4, 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 $4,100, suggesting about 31% 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.
