Specialty Retail company Amazon.com is standing out today, surging to $193.69 and marking a 3.9% change. In comparison the S&P 500 moved only -0.0%. AMZN is -13.62% below its average analyst target price of $224.23, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Amazon.com shares have outperformed the S&P 500 by 19.4%, with a price change of 44.4%.
Amazon.com, Inc. engages in the retail sale of consumer products, advertising, and subscriptions service through online and physical stores in North America and internationally. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Amazon.com's trailing 12 month P/E ratio is 54.4, based on its trailing EPS of $3.56. The company has a forward P/E ratio of 33.6 according to its forward EPS of $5.77 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the consumer discretionary sector has an average P/E ratio of 22.06, and the average for the S&P 500 is 27.65.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Amazon.com's PEG ratio of 1.35 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Amazon.com's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 84,946,000 | 52,729,000 | 32,217,000 | 290.71 |
| 2022 | 46,752,000 | 63,645,000 | -16,893,000 | -14.72 |
| 2021 | 46,327,000 | 61,053,000 | -14,726,000 | -156.8 |
| 2020 | 66,064,000 | 40,140,000 | 25,924,000 | 19.72 |
| 2019 | 38,514,000 | 16,861,000 | 21,653,000 | 25.19 |
| 2018 | 30,723,000 | 13,427,000 | 17,296,000 |
- Average free cash flow: $10.91 Billion
- Average free cash flown growth rate: 10.6 %
- Coefficient of variability (the lower the better): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, AMZN is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Amazon.com's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 9, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.18 as of the second quarter of 2024.
Amazon.com is by most measures undervalued because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend. The stock has mixed growth prospects because it has a a negative PEG ratio and decent operating margins with a stable trend. We hope you enjoyed this overview of AMZN's fundamentals.
