• Tech may be technically out of bear market mode right now, but it may seem risky to buy the dip today
• Thanks to many factors helping to support earnings growth, AMZN stock will likely sustain its current valuation
• Future price appreciation may arrive slowly, yet at a pace that still provides solid returns for long-term investors

With tech stocks (as measured by the Nasdaq composite) surging in recent days, tech is officially no longer in a bear market. Even so, you may still be hesitant to dive into Amazon (NASDAQ:AMZN) stock right now.

Still pricey, in theory AMZN stock could have more downside risk if the Federal Reserve’s increasingly tougher talk on tackling inflation leads to more aggressive rate hikes, putting pressure on valuations.

But while tech could re-enter bear market mode and some of the more richly priced names in the space could stand to see further multiple compression, that doesn’t necessarily mean a big drop for this tech behemoth.

While not cheap by any means, Amazon is far less pricey than its current price-earnings ratio suggests. Also, Amazon is projected to see big earnings growth during 2023, so its current multiple may be justified.

I’m not saying its shares will zoom like they did in 2020. Still, there are many ways that it can improve its earnings between now and 2025. Those buying AMZN today and holding it until then could see solid returns on their investment.

AMZN Stock and Valuation

Trading for 65.6x this year’s estimated earnings, Amazon may appear fully valued at today’s prices. Yet using this metric alone to determine whether this tech conglomerate, whose reach spans from ecommerce to cloud computing to media and beyond, may be short-sighted.

EPS for AMZN stock could zoom from $52.22 to $165.32 between 2022 and 2025. That’s a 3x jump in a few years’ time.

Sure, projections are hardly guarantees. An economic slowdown/recession could severely slowdown growth for its maturing retail segment and its faster-growing segments (like AWS). As a Seeking Alpha commentator argued earlier this month, even as Amazon’s overall rate of revenue growth slows down, there are many ways earnings could soar in the year ahead.

For one, the company’s margins could improve. In addition, the amount of its spending per year on capital expenditures may have already peaked. From here, Amazon could take its foot off the gas with growth investments, enabling earnings to rise.

With these factors in play, there may be enough to justify Amazon’s current valuation. 

Modest Upside Potential Going Forward

AMZN stock may not have the multiple compression risks of other tech names, such as e-commerce stocks  like Shopify (NYSE:SHOP). Or  fintech names like Affirm Holdings (NASDAQ:AFRM).

But downside risk is just one side of the equation.

You’re probably just as interested, if not more interested, in Amazon’s upside potential from here. It goes without saying that a 2020-esque surge is not likely. Although the fading of pandemic tailwinds hasn’t brought growth to a screeching halt, it’s going to be difficult for shares to justify a high double-digit move as seen between in March-April 2020.

Instead, the stock has a strong chance of behaving in 2022 like it did in 2021. Throughout last year, shares traded sideways as the underlying business caught up to its high valuation. Fortunately though, this sideways price action may not last for much longer. Earnings are set to increase in a big way over the next three years. If results fall in line with EPS estimates ($76.02 in 2023, $114.57 in 2024, and $190.66 in 2025), there is room for AMZN stock to increase in value.

However, any increase won’t be in tandem with the rate of earnings growth. Instead, Amazon’s valuation should normalize to something more in line with other mature tech companies (25x to 30x earnings). This points to the stock trading for between $4,766.50 and $5,719.80 per share by 2025.

Amazon Remains Worth it as a Buy-and-Hold Play

Based on my calculations, I believe that shares could appreciate by between 47% and 76.4% over the next three years. In other words, annualized returns of between 13.7% and 20.8%. Perhaps that’s not as exciting as the big runs experienced during the pandemic-era runaway bull market. But they are nice above-average returns nonetheless.

Keep in mind that this doesn’t mean Amazon stock won’t be volatile during this timeframe. As my InvestorPlace colleague Chris Lau recently wrote, a write-down of its Rivian (NASDAQ:RIVN) investment could be bad for shares in the near term. Between now and 2025, other uncertainties could temporarily put pressure on the stock.

Even so, Amazon isn’t as overvalued as it appears at first glance. Long-term investors may want to consider AMZN stock at today’s prices.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.