The decision regarding Amazon.com stock can feel like navigating a busy intersection, filled with fluctuating headlines, ambitious market expansions, and an unpredictable price chart. Recently, Amazon shares experienced a boost of 3.2% within a week. Although the 30-day movement is slightly negative at -0.8%, the broader picture shines brighter, showcasing a remarkable 33.1% gain over the last year and an impressive 79.3% return over the past three years. This trajectory underscores that Amazon’s growth is anything but stagnant.
So, what’s fueling this fluctuating momentum? Recent headlines reveal both Amazon’s relentless ambition and its ability to adapt. A striking example is the company’s commitment to invest $570 million in Vietnam to further develop its Kuiper satellite service, marking a significant step towards global expansion and infrastructure enhancement. Additionally, Amazon’s restructuring within its Whole Foods corporate team and strategic lobbying for regulatory changes in India highlight a proactive approach to refining its international strategies.
Yet, amidst the positive stock movements, value-focused investors need to consider more than rising share prices. Currently, Amazon’s valuation score stands at 3 out of 6 based on various key metrics, indicating that it appears undervalued in half of these assessments. But what does this score mean? How do you balance the company’s rapid innovation and growth potential against its current market price?
To better understand Amazon’s valuation, we can explore six distinct valuation approaches, shedding light on why these scores might not tell the entire story.
One of the most informative methods is the Discounted Cash Flow (DCF) model, which estimates a company’s intrinsic value by projecting future cash flows and discounting them to their present value. As it stands, Amazon’s current Free Cash Flow is $37.6 billion, with analysts projecting a substantial increase, anticipating the figure to soar to $231.2 billion by 2035. It’s essential to note that while analyst estimates are concrete for the first five years, the projections for the following five years are extrapolated based on recent trends.
When we apply the DCF method, we arrive at an intrinsic value estimated at $276.06 per share for Amazon. This means that, according to the DCF model, Amazon stock is currently trading at a 17.0% discount to its estimated intrinsic value. This signals a notable undervaluation, indicating that while Amazon’s growth narrative is acknowledged in the market, there remains substantial upside potential based on future cash flows.
Furthermore, for profitable companies like Amazon, the price-to-earnings (PE) ratio is a conventional yardstick for gauging value. The PE ratio reveals how much investors are willing to pay for each dollar of current earnings. As of now, Amazon trades at a PE ratio of 34.6x, which surpasses the Multiline Retail industry average of 22.2x, yet falls short of the peer group average of 57.1x. This suggests that while investors are ready to pay a premium for Amazon’s earnings compared to an average retailer, they are still cautious compared to other high-growth megacap stocks.
Enter Simply Wall St’s “Fair Ratio,” calculated at 43.7x for Amazon. This assessment factors in growth prospects, profit margins, risks, industry dynamics, and company size, providing a comprehensive benchmark that transcends basic industry averages or peer comparisons. By contrasting Amazon’s actual PE ratio (34.6x) with its Fair Ratio (43.7x), we find that the stock appears undervalued based on this measure as well. Investors are currently paying less than what would typically be expected in light of Amazon’s growth profile.
Beyond typical valuation ratios lies another promising route: the concept of Narratives. Narratives represent personal interpretations of a company’s story and future, allowing investors to articulate their expectations regarding revenue, profit margins, and the company’s true worth. Simply Wall St has harnessed this concept, enabling millions of investors to frame their outlook on Amazon.
This platform encourages users to share their viewpoints and evaluate how their narratives align with community sentiment. By providing tools to map out their assessments, investors can swiftly discern whether now is an optimal time to buy or sell based on their convictions. What sets Narratives apart is their dynamic nature, automatically updated as new data, such as earnings reports and market-altering news, emerges.
As a case in point, opinions on Amazon’s fair value can dramatically vary, with some investors projecting values as high as $434 per share, while others suggest figures as low as $151. This variance reflects the differing opinions on future growth trajectories and profitability potential.
Highlighted below are previews of two compelling Amazon Narratives currently trending:
- For the Bull Case, the fair value is projected at $234.75, indicating an undervaluation of 2.4% with a revenue growth rate of 13.6%. This narrative points toward Amazon’s resilience and long-term growth, even amid short-term stock price fluctuations and a slowdown in AWS revenue growth.
- Conversely, the Bear Case estimates a fair value of $222.55, suggesting it is overvalued by 2.9%, with a revenue growth rate of 15.19%. This perspective acknowledges Amazon’s strengths while warning of potential regulatory and macroeconomic challenges that may disrupt growth.
With varied outlooks and narratives unfolding, it becomes evident that deciding on Amazon’s stock isn’t straightforward. Whether you focus on traditional metrics like DCF and PE ratios or embrace a more personalized narrative-driven approach, the complexity of Amazon’s business landscape continues to fuel debates on its future valuation and potential investment strategies.