Is Amazon Stock Cheap?

eCommerce giant Amazon (NASDAQ:AMZN) is currently down nearly 40 percent YTD. With this massive and still growing company trading at such a large discount, is Amazon truly cheap at these prices?
Rising costs have been the primary driver of Amazon’s troubles this year. Facing increased fuel and labor costs, as well as a generally inflationary macroeconomic environment, the company has struggled to keep up earnings growth. In Q3, for instance, Amazon reported earnings of $0.28 per share. This was down from $0.31 and $0.62 in Q3 2021 and 2020, respectively.
Excessive investment in warehouse and fulfillment capacity during the COVID-19 pandemic has also weighed on Amazon this year. Although necessary to meet heightened consumer demand while stay-at-home orders were in place, this capacity has proved costly under more normal business conditions.
Like many other businesses, Amazon is struggling in foreign markets due to the unusual strength of the dollar in 2022. In Q3, for example, the company reported a $5 billion unfavorable impact from the currency market. This caused a total downward adjustment in net sales of 4 percent.

Amazon’s P/E and Other Valuation Metrics

Despite selling off considerably, Amazon’s price-to-earnings ratio has remained more or less consistent with its recent history. The stock trades at about 93 times earnings, fitting into a range that it has comfortably held since 2019. This is hardly surprising, as much of this year’s selloff was a response to lower earnings that made the stock less attractive at higher prices.
Price-to-sales, another popular value metric, tells a different story. Amazon is trading at 1.97 times its sales, the lowest level for this metric since 2015. This offers a bright spot for investors, provided Amazon eventually improves its margins and cash flows. If the company’s post-pandemic sales begin to translate into higher earnings, Amazon stock likely would be cheap at today’s prices.
A final important metric to look at is Amazon’s expected price-to-earnings-growth. This number currently stands at 8.06 for the coming 12 months, which is considered very high.
Amazon’s expected 5-year annualized growth rate, however, is about 26 percent. If it achieves this rate of growth over a sustained period of time, the high PEG ratio would be somewhat justified.

Analyst Forecasts

Analyst target prices can also offer some insights into Amazon’s expected performance in the near future. The median expected target price for Amazon in the next 12 months is $137, up 35.9 percent from the most recent price of $100.79. If the stock achieves such a dramatic rebound, it is certainly a bargain at today’s price.
It’s also worth noting that an overwhelming majority of analysts rate Amazon as a buy. Out of 49 analysts covering the stock, 39 have issued a buy rating on it. 7 rate it as an outperform, and 3 rate it as a hold. Based on this and the expected price targets, it’s safe to say that Wall Street is still very bullish on Amazon.

Amazon’s Plan to Regain Its Footing

Needless to say, Amazon will need to improve its earnings performance to see a rebound in its share prices. To this end, Amazon has implemented several aggressive cost-cutting measures.
In September, the company significantly reduced hiring at several of its divisions in order to bring labor costs under control. Recruiters have also been given much stricter guidelines with regard to salary, preventing them from making higher offers without direct management approval.
More recently, Amazon has been eyeing cuts to some of its less profitable business lines. Chief among these is Amazon Devices, the division responsible for Amazon’s proprietary hardware offerings. By cutting costs in less profitable areas, the company may be able to bolster its bottom line and free up capital to invest in businesses with higher returns.
Amazon is taking practical steps to address its costly excess fulfillment infrastructure. This year, the company began allowing sellers to store and ship products from its fulfillment centers, even if those products were sold from the sellers’ own websites. Sellers can now also store their goods at Amazon’s warehouses for a fee, allowing Amazon to capitalize on excess space added during the pandemic.

Is Amazon Cheap at Today’s Prices?

While Amazon’s valuation remains high, there is a good argument to be made that the stock is currently selling at a discount to its future growth potential. Even though inflation and high fuel prices have drastically affected Amazon’s bottom line, these challenges are likely temporary. Amazon also maintains an extremely strong moat in the eCommerce industry, as it is by far the dominant force in online shopping.
The strength of Amazon’s business can readily be seen in the continued increase of its revenues. Last quarter, even after adjusting for unfavorable currency conditions, the company reported a 15 percent year-over-year increase in net sales. With cost-cutting measures and the eventual easing of macroeconomic challenges, Amazon will likely begin to see higher earnings as a result of these steadily increasing sales.
Amazon also continues to see strong growth in its AWS cloud computing business. In Q3, AWS posted revenue growth of 27 percent, considerably faster than Amazon’s overall growth rate. As more businesses migrate toward cloud-based web services, Amazon will likely continue to achieve rapid increases in AWS revenue.
With all of this said, things could get worse for Amazon before they get better. High fuel prices and inflation will likely persist through the rest of this year. Sluggish consumer spending on the holidays could also lead to a worse-than-expected Q4 outcome.
Ultimately, Amazon is most likely cheap at today’s prices, but it could take a while for investors to see returns. The company is being bogged down by a variety of short-term headwinds but still has ample room for growth. Investors who are willing to buy and hold Amazon could see excellent returns if the company gets past these short-term challenges and begins posting stronger earnings.

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