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Amazon Stock Is Still Prime, But It’s Not a Screaming Buy

Increased competition makes it hard to justify Amazon stock's premium to its peers

Amazon (NASDAQ:AMZN) stock has been stagnant for the past few months. Since late summer, the stock has traded around the $1.800 per share level. Wal-Mart (NYSE:WMT) is challenging AMZN in retail. Microsoft (NASDAQ:MSFT) is catching up with Amazon in cloud computing. These developments make AMZN stock less of an invincible powerhouse than it once was.

AMZN stock
Source: Sundry Photography /

As we head into the holiday season, is now the time for investors to put Amazon stock in their shopping carts?

Based on the valuation of AMZN stock, I would say no. Amazon continues to trade at high multiples, even compared to most of its “FAANG” peers. Amazon will continue to generate annual sales growth in the 15%-20% range. But that may not be enough to support the current valuation of AMZN stock.

Amazon remains a solid business, but the Amazon stock price likely won’t set the world on fire going forward.

Reports of the Competition’s Death Have Been Wildly Exaggerated

For years, the bull case for AMZN stock was built on the company’s perceived invincibility. Amazon’s domination of e-commerce indicated that bricks-and-mortar retailers like Wal-Mart, Target (NYSE:TGT), and others were going the way of the dodo, many on the Street believed. Once Amazon muscled its competitors out of business, AMZN would parlay its success into high profit margins, tremendously boosting Amazon stock price, the AMZN stock bulls contended.

That thesis was partially correct. Amazon’s low prices and two-day free shipping took out a lot of focused retail names. A prime example is Toys R Us. That firm’s trademark and intellectual property may still exist, but former Toys R Us locations litter shopping centers from coast-to-coast.

But the fate of discount general merchandise retailers like Wal-Mart and Target was much less dire. Both adopted e-commerce strategies, synergizing “bricks and clicks” to go “omnichannel.” As InvestorPlace columnist Vince Martin discussed in his Nov. 25 column, Wal-Mart and Target’s recent success shows they can compete with Amazon.

Now Amazon must use gimmicks like one-day shipping to compete with WMT and TGT. Martin believes that one-day shipping could cause Amazon’s retail margins to drop. I agree with that assessment. Falling margins, of course, would be bad news for AMZN stock. The potential to take out the big dogs drove Amazon’s valuation. The fact that AMZN is now in tough battles with them on price and service is not a good sign.

If Amazon has to duke it out like the rest of retail, does AMZN stock really deserve such a high multiple?

Amazon Stock Could Grow Into Its Valuation

It isn’t fair to value Amazon stock the same way as pure retail names. After all, AWS, not Amazon’s retail business, is Amazon’s cash cow. But with the rise of Microsoft and others in cloud computing, AWS’s license to print money will face challenges. In the third quarter, for example AWS’s margins fell  to 25.5% from 31.3% in Q2.

But that hasn’t affected the valuation of AMZN stock. The company still trades at a high forward price-earnings ratio of 66. Amazon’s trailing 12-month enterprise value/EBITDA (EV/EBITDA) ratio remains high as well, at 27.

Most of Amazon’s FAANG peers trade at lower EBITDA multiples. With an EBIYDA multiple of 60, Netflix (NASDAQ:NFLX)  is the exception, but the rest have EBITDA multiples below 60:

  • Alphabet (NASDAQ:GOOG GOOGL) has an EV/EBITDA multiple of 18.1
  • Apple (NASDAQ:AAPL) has an  EV/EBITDA multiple of 15.6
  • Facebook (NASDAQ:FB) has an EV/EBITDA multiple of 18.4

Microsoft also trades at a lower EBITDA multiple  of 19.3. AMZN stock should trade closer to its peers. If AMZN stock had  an EV/EBITDA ratio of 19, Amazon stock price would be approximately $1,250, versus Friday’s closing price of $1,800 per share.  

Will the Amazon stock price take such a dive? Probably not. But AMZN stock may tread water around $1,800 per share, until the company “grows into” its valuation.

Amazon Stock Is Still Prime, But It’s Not a Stocking Stuffer for Your Portfolio

Until Amazon unveils a new game-changer, expect AMZN stock to remain quiet. The company has its work cut out for it. Both traditional retailers and big tech are threatening its competitive edge. Amazon stock is no longer invincible.

That means the shares’ current valuation is not sustainable. How much longer can Amazon stock trade at a premium to its peers? Something’s gotta give.

I don’t see the stock crashing down to its peers’ valuations. But the Amazon stock price could be stuck in neutral as AMZN grows into its valuation. With that in mind, look to Amazon’s competitors for opportunities. Amazon’s headwinds could be a competitor’s catalyst.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned companies.


Article printed from InvestorPlace Media,

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