Is Amazon’s Stock Undervalued?

by Trefis Team
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[Updated 01/11/2021] Amazon Update

Having grown by 72% since the end of 2019, Amazon’s stock (NASDAQ:AMZN) still has growth potential in the near term. AMZN’s stock grew from $1848 at the end of 2019 to $3183 now, compared to the S&P 500 which gained 18% since the end of 2019. The company has seen a high revenue growth over recent years, and its P/E multiple has fallen compared to 2017. We believe the stock, after the recent rally, has a good upside in the near term. Our dashboard Buy or Sell Amazon’s Stock has the underlying numbers.

During the Covid-19 crisis, Amazon saw its revenue rise by 35% in the first 3 quarters of 2020 as consumers preferred online shopping to reduce the risk of infection. In Q3 2020, Amazon beat consensus estimates for revenue recorded at $96 billion, up 37% y-o-y and earnings recorded at $12.63 compared to $4.31 in the same period of the previous year. Further, the company reported $146 billion of cash inflows from operating activities for the first nine months.

We expect Amazon‘s revenues to grow by 31% to $369 billion for 2020. Further, its net income is likely to rise to $19.5 billion, increasing its EPS figure to $38.21 in 2020. Thereafter, revenues are expected to grow further to $435.3 billion in 2021. In addition, the EPS figure will likely improve to $60.52, which coupled with the P/E multiple of around 62x will lead to Amazon’s valuation around $3758, about 18% upside compared to the current market price.

 

[Updated 07/10/2020] Amazon Stock Is At An All-Time High, But Will It Grow Any More?

After a near-70% rise since the market bottom on March 23 this year, we believe Amazon’s stock (NASDAQ:AMZN) doesn’t have any room to grow at its all-time high current price of around $3,200 per share. While the company is likely to continue to report strong revenue growth over the foreseeable future, and the increasing contribution of its high-margin Amazon Web Services (AWS) business should also have a positive impact on the profit margin, we think the current P/E multiple figure of nearly 140x is already too high – making further gains to the stock price very unlikely.

AMZN’s stock has increased from around $1,900 to $3,200 from March 23, 2020 – better than the S&P 500, which increased by around 41% over this period. The stock price has been on a run as Amazon benefited from millions of people in the U.S. and abroad turning to online marketplaces to fulfill their essential requirements like groceries, food, toiletries, and medicines. In these uncertain times where companies are cutting pays and jobs, Amazon has raised pay and hired more than 100K warehouse and delivery workers – and is planning to bring in more as it struggles to fulfill the huge, unexpected rise in demand. At the end of April 2020, the company had a workforce of 935K employees. In Q1 2020, the company recorded a 26% growth in revenue compared to the previous year.

 

Some of the stock price rise in the 2016-2019 period is justified by the fact that revenues more than doubled. Amazon’s revenues increased from $136 billion in 2016 to $281 billion in 2019, mainly driven by the contribution of Retail revenue from the North America segment. An improvement in net income margin from 1.7% in 2016 to 4.1% in 2019 helped net income swell 137% over the period.

The stock price increased during this period as margins and revenue grew, despite the P/E multiple normalizing from 150x in 2016 to 79x in 2019. The multiple has shot up again this year, though, as people are turning towards online retail and web services during the coronavirus pandemic, and the figure currently stands at an elevated level of around 140x.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to affect consumption and consumer spending adversely. Notably, Amazon’s stock is up by about 58% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 2%. Despite the coronavirus pandemic, the company saw a 26% growth in Total revenues for Q1 2020. Amazon web services led the revenue growth recorded at 33% y-o-y, while the North America retail revenue recorded a 29% growth y-o-y. That said, lower consumer spending and consumption over the coming months could likely lead to lower demand for discretionary items as consumers will focus on essentials.

 

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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