Is Amazon Stock Overvalued?

You’re fully aware of Amazon.com, Inc. (NASDAQ:AMZN). It has over 150 million paying Amazon Prime members and is one of the largest companies in the world any way you slice it.

The name is ubiquitous with 2-day delivery and includes everything from cloud storage and ecommerce to distribution, content creation, advertising services, consumer products, and more. It even owns the Washington Post and is competing with the government logistics in the Post Office.

Founder and CEO Jeff Bezos is the world’s richest man. He’s so wealthy that his ex-wife MacKenzie Scott is the world’s richest woman just off the AMZN shares she was awarded in the divorce settlement.

Brick-and-mortar retailers took historic revenue hits due to widespread city shutdowns that drove Amazon’s profits to double during the pandemic. The real question of whether you can get rich from AMZN shares like Bezos and Scott depends on this – is Amazon stock overvalued?

Let’s dive into Amazon’s assets, revenues, and business plans to decide if it’s worth the investment, starting with how it got where it’s at in the first place.

Why Amazon Stock Went Up?

Amazon stock has long been valuable. Its 1997 IPO sold for $18 per share, and AMZN closed in the $1000 range by the end of 2017.

The 2020 coronavirus pandemic then pushed it into the $3000 range. This led some investors to wonder whether it would eventually split, something we’ll discuss more below.

But Amazon’s 2020 success comes at a time when most businesses (and the economy as a whole) are underperforming.

The U.S. unemployment rate reached a historic high of 14.70 percent in April 2020. Crude oil prices dropped below $0.00 for the first time.

The International Monetary Fund calls it the worst economic event since the Great Depression nearly a century ago.

As the White House and Centers for Disease Control issued lockdown orders, state and municipal governments followed suit with orders to keep only essential businesses open.

Widespread panic shopping and hoarding occurred both at an enterprise and consumer level, as those who had money stockpiled whatever they could.

It’s a combination of all these things that inevitably doubled Amazons profits, as it accounts for 38 percent of the e-commerce market. Its closest competitor in that regard is Walmart, which has 6 percent.

Even as Bezos fights antitrust action from a House Judiciary Committee heading into the holiday season, the company is continuing its dominance of a sector it has been systemically dominating for over 20 years. But retail is only one piece of Amazon’s revenue streams.

Amazon Financials Post-Covid

Amazon earned $5.2 billion net income in the second quarter of its 2020 fiscal year off $88.9 billion in revenue. It’s annual revenue in 2019 was $280.522 billion, which is a 20.45 percent increase from $232.887 billion in 2018. The company’s business model is easy to figure out through its financial filings.

While exact percentages vary year-by-year, the order is pretty consistent, and the general breakdown of Amazon’s revenue streams is as follows:

1.     E-commerce (65%) – this includes anything fulfilled by Amazon (FBA), Amazon Basics, Kindle, Echo, etc.

2.     Third-Party Commissions (18%) – this includes all sellers using their own fulfillment, Kindle/Echo/Prime content creators, Amazon Affiliates, etc.

3.     Amazon Web Service (10%) – AWS hosts some of the biggest companies in the world, including Netflix, Twitch, LinkedIn, Facebook, the BBC, Baidu, ESPN, and more.

4.     Prime and Subscriptions (5%) – Amazon Prime, Prime Video, Kindle Unlimited, Amazon Music, and Audible all have subscriptions, and some money from “subscribe and save” also is counted in here.

5.     Other (2%) – Amazon’s financial services and co-branded deals are grouped in this bucket.

This gave Amazon the e-commerce version of Walmart’s successful retail strategy. Walmart’s explosive growth at the turn of the century was based on it buying real estate to build an efficient retail distribution network.

It’s now leveraging that, along with partnerships with third-party vendors like Instacart and Postmates, to bring same-day delivery to a broader audience than even Amazon can. However, Amazon is where it is now because it used Walmart’s strategy for online real estate.

As the world stayed home and depended on services like Facebook, Netflix, and even Amazon itself, Amazon continued to generate record-breaking profits, driving the stock value up. It also has a habit of competing with its own partners and vendors, which certainly helped it grow.

Is Amazon Valuation Too High?

This is a fun question, because yes Amazon’s stock is too high. That doesn’t mean it’s not earning its value, even as potential competitors from Poshmark to Etsy (ETSY), eBay (EBAY), and Imperfect Foods increase their sales too.

Amazon has the money to spend on whatever it wants right now, and there’s a simple solution to bringing the price down – a stock split.

Announcing a stock split heading into the holiday 2020 season would follow suit with companies like Apple and Tesla. It would also bring the company into a more affordable position for the average retail investor.

As it stands, AMZN is one of the most expensive investments available on American markets, and a split would help it fit in better with everyone but Berkshire Hathaway.

Will Amazon Stock Drop?

There’s a chance that even without a split Amazon’s stock experiences a slow decline over the next five years. However, it’s going to take a lot of legal problems to make that happen, as it so far appears bulletproof.

Even if it does deflate, it’s unlikely you’ll lose a large percentage of your investment. Of course, unlike Walmart, Amazon stock doesn’t pay a dividend, so you’ll only experience small gains unless the stock splits.

So long as Amazon’s cloud hosts heavy hitters and its marketplace has inventory, the company isn’t going anywhere anytime soon.

Is Amazon Stock Overvalued? The Bottom Line

Amazon’s valuation is approaching $2 trillion based on $321.782 billion in revenue in the 12 months ending June 20, 2020. There’s 5x-6x multiplier on the investor value versus revenue.

Still, the company’s massive assets and aggressive expansion tactics are sure to weather any economic storm. You’ll see Netflix and Facebook experience a squeeze before Amazon, as they pay it for digital real estate.

And over two million publishers still count on Amazon Affiliate commissions. It’s a safe buy and hold situation.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.