At this point, asking investors to pour capital into Amazon (NASDAQ:AMZN) stock seems an unnecessary exercise. With each passing day, the company goes from strength to strength, blowing past its own guidance as well as street estimates.
With a strong holiday quarter coming up, it seems likely that we could see the stock reach $4,500 per share before the close of the next six months. Based on the data provided, the e-commerce giant looks set for massive top-line growth.
Yes, several investors will likely be scratching their heads. Why is it responsible for someone to pay 96.73 times forward price-to-earnings for a stock when several tech startups are out there to choose from? All of whom have the potential to be multi-baggers. Well, there are a couple of problems there.
First, AMZN stock is one that has a proven track record. It has a YTD return of 79.2%, comparing very favorably to the S&P 500 total return of 10.2% during the same period. If you zoom out and look at the 5‑Year Return, we get a figure of 405.1% versus the total index return of 84.5%.
Second, if you are feeling squeamish regarding the stock’s valuation, you shouldn’t. AMZN stock still is the cheapest amongst the FAANG stocks in terms of price-to-sales. Even though shares are expensive vis-à-vis the market, they aren’t really that expensive if you take everything into context.
AMZN Stock Will Ebb and Flow, but the General Trajectory Is Upward
Let’s talk about the elephant in the room first. Any discussion involving AMZN stock will eventually come back to valuation. For years Amazon has been a highly coveted stock, and the multiples reflect that.
At this point, the e-commerce giant’s shares are trading at a 311.11% premium to the market. But the way I look at it is that shares will consistently move higher because of the solid fundamentals. And usually, shares always trend higher whenever EPS is reported, and the company beats estimates, except for the recent quarterly results.
But you can chalk that down to its fourth-quarter profit estimate, which the markets are perceiving as conservative. Despite the e-commerce giant shattering third-quarter earnings expectations, reporting EPS of $12.37 versus the $7.41 consensus estimate. Amazon also reported $96.1 billion in revenue versus $92.71 billion consensus and year on year sales growth of 37%.
In reporting earnings, Amazon said its operating profit would possibly dip in the fourth quarter, as it expects to spend approximately $4 billion on Covid-19 induced costs. Consensus estimates point to an operating profit of $5.81 billion, far more optimistic than what Amazon is saying. The latter estimates operating profit to fall between $1 billion and $4.5 billion.
Valuation–Don’t Be Overly Concerned
So, we’ve already established that AMZN stock will rise since it has a habit of over-performing whenever earnings drop. That trend should hold steady. But how is the stock valued against some of its peers?
Much has been said about the astronomical multiples of FAANG stocks–Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Amazon, and Netflix (NASDAQ:NFLX). Undoubtedly, these shares are trading at premium valuations compared to the market median, but each stock comes with its own set of risk-return trade-off.
Amazon has a unique business model that places it miles ahead of its competition. It’s also not sitting on its heels. It’s investing a substantial amount of cash on acquisitions, research, and development activities. If you have ever ordered anything from Amazon, you would know the ease and convenience customers can shop. That’s is serving as the bac record sales. And despite the high sales, AMZN stock trades at the cheapest price-to-sales of the five most popular and best-performing American technology companies.
Amazon Will Continue to Be a Winner Moving Forward
By every margin, Amazon has consistently impressed investors for a long time now. That fact will not change in the coming quarters. I believe that any target that Amazon sets in terms of sales growth will be conservative. The recent quarterly results firmly indicate that growth is across the board and is not restricted to just one segment or region. North America reported $59.4 billion sales, a 39.2% increase over the $42.6 billion reported in the 2019 third fiscal quarter. Meanwhile, the International segment saw 37.2% sales growth, with revenues growing to $25.2 billion from $18.3 billion.
As we’ve already discussed, although AMZN stock is more expensive than the industry, it’s still trading at relative discounts to the other mega-cap stocks. One minor thing that I want to address before we close is Jeff Bezos’ recent sale of AMZN stock.
The billionaire investor sold over $3 billion worth of the company’s stock recently. A few keen-eyed investors may have seen this as a sign of weakness, but you need to keep one thing in mind. Bezos has many interests that are not restricted to Amazon; one such area is space exploration. Over the past few years, that is Bezos has been selling his AMZN stock as part of an established investing plan to finance his space-travel company, Blue Origin. I expect that to continue, so don’t correlate these stock sales to anything related to Amazon’s business lines.
Okay, with all these points made, there is just one more thing to say. Buy AMZN stock.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
