On August 6, 2023, Amazon.com Inc (AMZN, Financial) experienced an 8.27% gain, with an Earnings Per Share (EPS) (EPS) of 1.27. This raises the question: is the stock significantly undervalued? This article provides a comprehensive valuation analysis of Amazon.com Inc (AMZN) to answer this question. Continue reading for a deeper understanding of the company's intrinsic value.
Company Overview
Amazon.com Inc (AMZN, Financial) is a leading online retailer and one of the highest-grossing e-commerce aggregators. In 2021, the company reported $386 billion in net sales and an estimated physical/digital online gross merchandise volume of approximately $578 billion. Retail-related revenue accounts for approximately 80% of the total, followed by Amazon Web Services' cloud computing, storage, database, and other offerings (10%-15%), advertising services (5%), and other. International segments make up 25%-30% of Amazon.com's non-AWS sales, with Germany, the United Kingdom, and Japan leading the way.
As of August 6, 2023, the company's stock price stands at $139.57, while its fair value (GF Value) is estimated at $202.13, suggesting that the stock might be significantly undervalued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from our exclusive method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) at which the stock has traded.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
According to our GF Value estimation, Amazon.com stock is believed to be significantly undervalued. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Given that Amazon.com is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, it's crucial to research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are great ways to understand its financial strength. Amazon.com has a cash-to-debt ratio of 0.46, which ranks worse than 51.32% of companies in the Retail - Cyclical industry. The overall financial strength of Amazon.com is 6 out of 10, indicating that the financial strength of Amazon.com is fair.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Amazon.com has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $538 billion and Earnings Per Share (EPS) of $1.27. Its operating margin of 2.54% is worse than 56.68% of companies in the Retail - Cyclical industry. Overall, GuruFocus ranks Amazon.com's profitability as strong.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Amazon.com is 21.9%, which ranks better than 83.33% of companies in the Retail - Cyclical industry. The 3-year average EBITDA growth is 0.5%, which ranks worse than 66.89% of companies in the Retail - Cyclical industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Amazon.com's return on invested capital is 5.3, and its cost of capital is 11.3.
Conclusion
In conclusion, the stock of Amazon.com Inc (AMZN, Financial) is believed to be significantly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks worse than 66.89% of companies in the Retail - Cyclical industry. To learn more about Amazon.com stock, you can check out its 30-Year Financials here.
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