When you have a stock like Amazon.com, Inc. (NASDAQ:AMZN) that continues to inch higher every day and consistently outperform markets, it is important to contextualize the performance of AMZN stock in a long-term window. That allows you to understand if Amazon can continue to generate alpha over the next several months and years.
In AMZN’s case, the stock’s big run-up began early in 2015. That followed an ugly 2014 that had many analysts throwing in the towel.
In 2014, paid unit growth was slowing. Amazon was spending an arm and a leg on video content to compete with Netflix, Inc. (NASDAQ:NFLX). Amazon Web Services’ growth was being hampered by a cloud infrastructure price war with Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL). The international growth story was weakening. Margins were compressing.
At the end of the day, AMZN stock was consistently missing Street estimates in 2014. Amazon stock started the year at $400, but ended it at $300. Things actually got so bad for AMZN that analysts were asking questions like this on the October 2014 conference call:
“Can you tell us or remind us what financial measures are important to you guys and which financial measures you hold yourselves and the board hold you accountable to? Because it’s a little hard to see any of them making positive progress.”
It looked like Amazon was a growth machine that was losing steam. AMZN stock was doomed to fail due to the company’s inability to record a profit.
But things started to turn around in the beginning of 2015. Retail margins expanded. AWS started to yield positive and material effects on the profit line. Domestic and international retail growth strengthened. Profits, not losses, became the norm. Amazon was blowing by Street estimates, and AMZN stock subsequently took off.
What to Do With AMZN Stock Now
History says that while the market was unsure of the Amazon growth story three years ago, it is now fairly certain that AMZN has tremendous potential to scale profits.
I don’t think the market is going to change its mind on AMZN stock anytime soon. Amazon is making huge inroads in the delivery market. Like AWS, that could be extremely additive to the profit line. Amazon continues to buff out its Prime package, recently adding live sports to the mix. That’s huge, because Prime customers are far more valuable than non-Prime customers to Amazon.
Retail bankruptcies are at a post-recession high, and the shrinking of the brick-and-mortar retail landscape is a big tailwind for AMZN retail. Even Amazon’s ad platform is gaining significant traction.
With all of these secular tailwinds, I think Amazon stock only heads higher.
Bottom Line on Amazon Stock
Amazon is a great example of a stock growing into its valuation. A year ago, trailing twelve month earnings per share were $1.25. Today, they are $4.90. That is a near 4-times increase in a year. Meanwhile, the price-to-earnings multiple has compressed from around 500-times to 180-times.
The P/E multiple compression will only continue. Analysts are calling for about $7.23 in EPS this year, and $12.40 next year. That is 60% compounded earnings growth over the next two years. The forward P/E multiple is now 73-times. A 73-times forward multiple for 60% compounded earnings growth is actually a fairly good price-to-earnings-to-growth profile in this market.
As the P/E multiple compresses, the PEG profile will become more attractive. That will attract more buyers. I think this dynamic will continue to push AMZN stock higher for the next several quarters.
As of this writing, Luke Lango was long AMZN.
