Is Amazon’s Stock Overvalued Or Undervalued?

The logo of Amazon is pictured inside the company's office in Bengaluru, India, on April 20, 2018. (Abhishek N. Chinnappa/Reuters)

Amazon.com, Inc. shares have underperformed the S&P 500 in the past year, generating a total return of 0.37 percent.

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 percent over the past five years, suggesting its earnings multiple is on the low end of its historical range.

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 percent higher than the S&P 500 as a whole and makes Amazon stock look relatively overvalued. It’s even roughly 100 percent 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 percent upside from current levels.

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.

By Wayne Duggan

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