Amazon (NASDAQ:AMZN) stock has seen king-sized gains since the start of the coronavirus pandemic. Sales in the second quarter boomed 40% as people turned to e-commerce for daily needs, pumping up shares over 105%.

Yet, something strange has happened to the e-commerce king this summer. Over the past several months, Amazon has gradually gotten lumped in with the likes of McDonald’s (NYSE:MCD), Target (NYSE:TGT) and other blue-chip companies.

And for a good reason. Investors buying Amazon today will own a very different company than they would have 10 years ago. Gone are the days of sustained 30% annual growth. While AMZN stock still shows long-term upside, investors will have to get used to Amazon as a slower-growing blue-chip company. So here’s why, at $3,500, Amazon is showing signs of slowing down.

AMZN Stock: A Story of Slowing Growth

While Amazon’s sales have skyrocketed during the pandemic, analysts are starting to model in just 15%-20% growth beyond 2021.

Things weren’t always this way. Between 2006 and 2018, Amazon grew revenues at 29% and EBITDA at 34% annually, earning the company an “A” grade on my Quantitative Stock Rank (QSR) system. Few companies have managed that increase for so many years.

Yet, as a massive $1.6 trillion company, growth has naturally slowed. In 2019, Amazon grew revenues at just 20%. That’s still faster than 89% of all other companies in my QSR universe but slower than smaller tech upstarts such as Zoom (NASDAQ:ZM), Carvana (NYSE:CVNA) and Etsy (NASDAQ:ETSY) which averaged 75% growth through mid-2020).

Much of this has to do with e-commerce market saturation. In 2019, American consumers spent 10.9% of total retail sales online. By the end of 2020, analysts estimate that the number will jump to 14.5%. Such a fast change would have been meaningful a couple of years ago. Today, however, Amazon generates so much revenue ($321 billion, to be precise), that the company needs huge gains to move its needle.

Slowing Growth, Higher Quality

Slowing growth, however, doesn’t mean Amazon has turned into a bad investment.

Far from it.

The company has used its massive scale to solidify its lead in e-commerce fulfillment. RBC Capital Markets, an investment bank, estimates that Amazon can now deliver the same day to 72% of the U.S. population.

The company’s lead has shined through in its financial figures. Third-party marketplace sales now account for 53% of company revenues, and analysts estimate that Amazon’s share of U.S. e-commerce will rise to 50% by 2021.

These factors have helped drive EBITDA margins from 6.5% in 2008 to 12.7% in 2019. Over the next five years, Morningstar, a corporate rating agency, estimates that margins will almost double again. (Amazon has famously kept margins low by reinvesting heavily into its business)

In other words, AMZN stockholders have invested in one of the widest-moat companies available in the world.

Adjusting these figures gives Amazon a “B+” in financial strength, a phenomenally high score in an industry marked by exceptionally high capital expenditures. FedEx (NYSE:FDX), by comparison, earns a “C+.”

What’s Wrong with AMZN Stock at $3,500?

One word: price.

In the QSR “value-for-money” score, AMZN earns a mediocre “D+.” That’s because, at 41 times EV/EBITDA, the company falls in the top-10% of most expensive U.S. companies.

To justify its current value, Amazon would have to compound growth at 14% and triple its EBITDA over 10 years. The company would also have to slow working capital growth significantly, netting its capital requirements to zero over the long run.

That won’t be easy for the e-commerce giant. For instance, in 2019, the company plowed $16 billion into property, plant and equipment (PP&E), and another $2.4 billion into working capital. (This was on just $14 billion in operating income.) In other words, the company had to sink $1.30 of investment to generate just $1 of income.

At today’s nosebleed valuations, investors are betting that AMZN’s cash investments in logistics and server networks will eventually slow. That’s a reasonable assumption — most young companies eventually age past their “growth” phase. UPS (NYSE:UPS), for instance, spent just 74 cents of investment to generate $1 of income over the past 12 months. Amazon’s final number could end up even lower.

But suppose it turns out Amazon’s infrastructure projects have an insatiable appetite for cash. In that case, the financial drain could decrease AMZN stock fair value by 35% or more.

Has “Good” Become the New “Great”?

Should Investors Buy AMZN Stock for 2021?

Once we account for Amazon’s artificially low EBITDA margins, the company scores a decent “B+” in my QSR scoring methodology. That signals above-average future returns, but not eye-popping 1,000%-per-year lottery payouts. (To put things in perspective, a 1,000% return on Amazon stock would push its market capitalization to $17.6 trillion, or almost one full year of U.S. GDP)

Amazon is still a great business: investors should expect Amazon to win massively in e-commerce, cloud computing, and digital media. A decade from now, Amazon will almost certainly still dominate the global retail industry.

But when it comes to the company’s stock, investors should brace for good (not great) future returns. And if “good” is good enough for you, then AMZN stock remains one of the bluest blue-chip companies today. But if you’re looking for “A+” returns, you’ll have to consider smaller, faster-growing companies.

On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.