As an tech analyst who has covered Amazon‘s meteoric rise for over a decade, I‘ve fielded the "is Amazon stock overvalued?" question countless times since the company cleared the $1 trillion valuation mark.
It‘s not hard to see why the stock price confounds many investors. At around $94 per share, Amazon trades at 85x earnings and a nearly $1 trillion market cap.
In this blog, I‘ll provide my in-depth perspective on Amazon‘s valuation by analyzing all angles of this unique company‘s past, present and future. Expect lots of data, charts and metrics that support why I believe Amazon justifies its premium, albeit not without risks. Let‘s dive in.
Introducing the Amazon Empire
It‘s easy to forget Amazon started off selling only books online. Frankly hard to imagine given Amazon has disrupted multiple massive industries over the past 25 years. Today Amazon‘s empire includes:
- A retail/logistics juggernaut on pace for $500+ billion in 2022 gross merchandise volume.
- AWS – the clear #1 player in cloud computing raking in $80 billion annually.
- A top 3 global digital ad business expected to generate over $40 billion.
- Over 200 million Prime membership subscribers who provide recurring high margin revenue.
To put Amazon‘s dominance into context, look at how much the company has grown since 2012 across key financial metrics:
| Key Financials | 2012 | 2022 | 10 Year CAGR |
|---|---|---|---|
| Revenue | $61 billion | $502 billion | 34% |
| Net Income | $631 million | $33 billion | 105% |
| FCF | $4.2 billion | $46 billion | 30% |
| Market Cap | $113 billion | $1.05 trillion | 25% |
Rare to see a company of this size grow so rapidly for so long. But can Amazon really justify its nearly $1 trillion valuation today?
Analyzing Amazon‘s Stock Valuation
Given Amazon‘s 85x P/E ratio versus the market average of 19x, investors are clearly pricing tremendous future earnings growth into the stock price. But what exactly are they betting on?
The Bull Case – Outsized Growth Runways
Bulls see multiple avenues for Amazon to compound earnings via outsized revenue growth and margin expansion:
1. Retail/Logistics Flywheel: Amazon‘s logistics investments drive faster Prime shipping and wider selection, fueling more retail revenue/margin dollars for future investments.
2. Ad business Scale: More merchants/brands advertising on Amazon‘s storefronts due to the highly targeted demand.
3. Cloud Leadership: AWS and Amazon‘s consumer data/ML expertise widen its cloud edge, especially with enterprises.
Combining tanks growth across ecommerce, advertising, cloud and subscriptions could reasonably support 25%+ CAGR for years to come.
Here‘s a snapshot of how Amazon‘s forward P/E multiple has expanded over the past decade. Investors clearly see significant growth runway.
Image source: YCharts
The Bear Case – Execution Risks
On the other hand, there are areas that may threaten growth assumptions:
1. Macro Conditions: A recession, inflation or consumer spending shift negatively impacts retail.
2. Margin Pressures: Rising costs in transport, labor and AWS crimp profits.
3. Competition: The retail landscape and cloud market get more competitive.
Under a scenario of perfectly executed slowing growth, analysts see earnings expansion halving. I believe the bear case probably sets Amazon‘s fair value around 60x forward earnings or ~15% downside.
Assessing the Risks
Does Amazon‘s premium valuation leave room for error? I would argue yes from a long-term perspective for 3 reasons:
a) Track record of reinventing itself and patience with investments gives confidence in the leadership.
b) The loyalty of Amazon‘s customers and ecosystems makes it difficult to displace their competitive positioning.
c) Valuation supports reasonable volume/mix deterioration before raising concerns.
As an analyst, I tip the scale towards the bullish outlook. But I also acknowledge the margin of safety isn‘t huge. Investors with lower risk tolerances may want to wait for a larger discount.
Wall Street‘s Amazon Price Targets
Looking at what major finance institutions project reinforces the upside/downside dynamic I outlined earlier.
Morgan Stanley‘s extremely bullish $175 price target implies 87% upside, which would be supported by 30%+ EPS annual growth for 5+ years.
Meanwhile, Wells Fargo‘s $110 target (17% upside) bakes in more conservative low 20% annual EPS growth.
On average, analysts rate Amazon a firm "Buy" with $151 price target (~60% upside). They expect solid 20-25% annual earnings growth on average over the next 5 years.
Final Thoughts – Long-Term Winner, But Patience May Be Needed
Stepping back, I believe investors with multi-year time horizons will be well rewarded buying Amazon stock around $94.
The company‘s ambition, customer loyalty and operational excellence support consensus 20-25% EPS growth potential. But expectations already reflect optimism, limiting near-term upside.
In the long-run, Amazon‘s still has a visible pathway towards $200+ per share. Reaching that milestone though may realistically take at least 3-5 years.
For investors focused on value, I‘d recommend waiting for a larger margin of safety during the next market downturn. But growth investors buying Amazon should prepare to weather some volatility before the next leg higher.
