Amazon (NASDAQ:AMZN) stock is 17% off its 52-week high. After reaching prices above $2,000 in July, shares have dipped back to around $1,735 per share. With an $858 billion market cap, at first glance it seems the company is too big to grow further.
But Amazon is actively keeping the growth train humming. By expanding its brick-and-mortar presence, Amazon bolsters its retail ecosystem. Other growth opportunities could move the needle as well. But what does this mean for Amazon stock? The stock continues to trade at a high valuation, but multiple catalysts could move the needle.
Let’s take a closer look and see whether shares are a buy at the current Amazon stock price.
New Developments Could Move AMZN Stock
New developments could boost the Amazon stock price. The first is Amazon’s new grocery chain. While the company already owns Whole Foods, these new stores will be under a separate brand. The company is testing out the stores in the Los Angeles area, with plans to expand into other markets.
As rivals like Walmart (NYSE:WMT) and Target (NYSE:TGT) expand online, Amazon is bringing the battle to its home turf. This expansion also allows for a rollout of its cashier-less “Go” technology. The company has already opened cashier-less convenience stores. In addition, Amazon is in talks to sell this technology to third-party companies. Potential customers include airport retail chain CIBO Express, as well as Cineworld’s (OTCMKTS:CNWGY) Regal Cinemas chain.
There are many ways “Go” technology could boost AMZN stock. Amazon could turn it into a business-to-business cash cow, like it did with Amazon Web Services (AWS). Amazon could also use it as a loss leader to bring new customers into the AWS fold.
On Sept. 25, Amazon unveiled new Alexa-integrated products. These include clocks, earbuds, glasses, ovens and speakers. In coming years, Amazon could further expand its consumer electronics business.
These are many more catalysts that could drive the Amazon stock price higher. But with shares richly valued, does AMZN stock already reflect this? Let’s take a closer look and see whether today’s share price makes sense valuation-wise.
Amazon Stock Valuation in Line with Growth Potential
Amazon trades at a rich valuation. The company’s forward price-to-earnings ratio is 72.9. Its trailing enterprise value/EBITDA ratio is 26.7. AMZN stock trades higher than most of its FAANG peers. FAANG is an acronym for Facebook (NASDAQ:FB), Amazon, Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
Alphabet, Apple and Facebook trade at lower valuations. Their forward P/E ratios are in the 20x-30x range, and their EBITDA multiples are between 13.2 and 17.6. Netflix is the only FAANG component trading at a higher valuation than Amazon. NFLX trades at a forward P/E of 82.7 and an EV/EBITDA of 64.5.
But the FAANG stocks may not be Amazon’s most relevant peers. Amazon has more in common with Alibaba (NYSE:BABA). Blurring the lines between retailer and full-fledged conglomerate, both have expanded into many parts of the retail space. By doing so, they have built retail ecosystems in their respective home markets.
Alibaba trades at a lower forward P/E (37.2), but a similar EBITDA multiple (26.1). So what’s the smarter buy? Alibaba has the “rising middle class of China” catalyst going for it. But Amazon has plenty of runway in the slower-growing U.S. economy. As consumer spending moves online, Amazon is the clear winner. By expanding into brick-and-mortar, Amazon can solidify its e-commerce moat. Both dynamics bode well for the Amazon stock price.
A ‘Prime’ Opportunity — At a Lower Price
AMZN stock is richly priced, but the growth story is still in motion. The recent developments mentioned above could move the needle. In addition, other catalysts I’ve discussed previously (such as online advertising), are still in play. With this in mind, AMZN will likely meet consensus revenue estimates for 2020 ($331.3 billion).
This could mean upside for the Amazon stock price, but with some caveats. Amazon has yet to make a big stumble. The push into brick-and-mortar could be a costly mistake. If Amazon’s growth starts to slow, the premium valuation will dissipate. Shares will start trading in line with its FAANG peers.
With this in mind, AMZN stock may be a strong buy at a lower price. Wait for additional pullback before entering Amazon stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
