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Investors should take Amazon’s Valuation with a Pinch of Salt
Stock Analysis & Ideas

Investors should take Amazon’s Valuation with a Pinch of Salt

Amazon (AMZN) is an American multinational company focused on e-commerce, streaming, cloud services, and more. I’m bullish on the stock.

Current Valuation and Bootstrapping

Amazon stock is trading at a price-to-earnings discount worth 55.72% when compared to its normalized 5-year average. Many investors may see this as a dip-buying opportunity, and that may well be the case. However, it certainly is not if you based your decision on its price to earnings ratio, as that should be taken with a pinch of salt.

Many large firms use a bootstrapping approach to lower their PE ratios by acquiring high earnings-per-share subsidiaries. This is usually done to retain favorable relationships with their stakeholders or simply to reignite the company’s growth.

Amazon has made notable acquisitions lately, including Whole Foods, Metro-Goldwyn Mayer, Zoox, and Twitch, to name a few. The company has used a conglomerate-style strategy in which it’s broadened its horizon into other industries to diversify its revenue streams. Although this strategy may pay off, it’s often seen as inefficient by the stock market due to the divergence away from its core industry concentration; you’ll thus often see investors price a conglomerate discount into the stock price.

Returning to my initial mention of the stock’s PE ratio, Amazon’s PE ratio has declined recently, but earnings per share is still anticipated to grow at a rate of 31.49% over the next three to five years. I’m not saying that this won’t come to fruition; however, investors should take it with a pinch of salt as subsidiary growth often slows down when they’re acquired, leading to inaccurate EPS estimates for conglomerates.

What to Expect, Moving Forward

I’m not implying that we’ll see a further pullback in Amazon’s share price; in fact, I think we’ll see more progress in 2022, but it will likely be much slower than initially expected.

The firm is still operating on a broad-based sales to Capex ratio of 29.08X, which is impressive considering its current lifecycle. Amazon still possesses market dominance, which could see its stock price perform well moving forward, just not at the rates we’ve experienced over the past 10-years.

Wall Street’s Take

Turning to Wall Street, Amazon has a Strong Buy consensus rating, based on 22 Buys assigned in the past year. The average Amazon price target of $4192.86 implies 45.6% upside potential.

Concluding Thoughts

Amazon stock will likely show good results this year, but much slower than anticipated. The 5-year low PE ratio should be considered in the context of the firm’s acquisition strategy when placing a valuation on the stock.

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