Julie Clopper/iStock Editorial via Getty Images You’ve heard the rebuttal for over two decades now: Amazon ( AMZN ) is expensive at a p/e of 50-80 or whatever it is at a given moment. Even as it hovers almost 24% below its high, this p/e mantra may be the most frequented comment here on Seeking Alpha regarding this stock. For example, last week in an article about the “market crash is likely only beginning,” I wrote this: comment on Seeking Alpha One of the replies was this: AMZN p/e is still 57, hardly cheap. This younger generation of “buy the dip” “investors” has never experienced a true crash. As someone who invested during the first dot-com bubble and afterward, clung to the Graham and Buffett value methodology, I too fell for that argument. Eventually I finally got it; Amazon actually makes respectable profits, however they shield it from taxes by reinvesting. This distorts their p/e.
Yes, it looks like Amazon has miniscule operating margins, but when you add back the R&D spending – which is reinvestment in growing the company – you realize that actually, their operating margin typically hover around 10% or more. Much better than the low to single digit percentage which gets reported.
If they wanted to bolster their earnings, they could tone down the growth spending and bring down their p/e. As an investor though, you don’t want this right now given that they continue grow revenue in the ballpark of 30% annually and an ROE of 20-30%. Determining when Amazon is cheap vs. expensive
While not my first choice, the price to sales, or enterprise value to revenue, are probably the most cited alternatives for valuing this company. Here’s how that currently looks: Data by YCharts At around 3.2, Amazon is around its 5-year low. During the 5 years preceding that, it averaged in the low to mid 2s. The bearish argument would be that therefore, the stock has 33% downside. The bullish rebuttal would be that it’s a vastly different business now vs. then.
AWS, which is the most valuable part of the company, should trade at a 9-12x if it were a stand-alone. That’s my personal opinion, however some suggest a 20-30x multiple .
The retail side should be <2x and perhaps even around 1x, if you want to compare to South Korea’s Coupang ( CPNG ). If comparing to Walmart ( WMT ), you could make the case for 0.5 to 0.75x.
Per their most recent 10-Q , their AWS segment produced $16,110 billion in revenue, compared to $65,557 billion for everything else in North America and $29,145 for everything else international.
Whatever multiple you deem is appropriate for each segment (AWS and everything else), when you marry the two together, you realize that 3.2x combined is relatively low.
My favorite metric for valuing Amazon is enterprise value to EBITDA, which is earnings before interest, taxes, depreciation, and amortization.
Over the past 10 years, Amazon’s EV/EBITDA has ranged from 22.85 to 50.74. Its median is 34.25 ( per GuruFocus ). What is it currently? Data by YCharts 21.87 per YCharts and GuruFocus reports 22.85. Pick your source and it’s either at or quite close to the 10-year low.
I also like using operating cash flow for gauging Amazon’s value (or lack thereof) at any given time. Right now that sits at the lowest quartile of the last 13 years: Amazon price/OCF So how does Amazon compare to Microsoft ( MSFT ) on these metrics? Data by YCharts Unlike Amazon, Microsoft’s p/s just keeps creeping higher.
Even though it’s 12.75x, of course it would be foolish to suggest it’s 4x more expensive than Amazon. Microsoft is almost entirely a software company, SaaS at that, and doesn’t have the capital intensive needs of Amazon retail. The warehouses, logistics, competitive pricing, and the nearly 1.5 million employees all but guarantees you should be valuing the retail side to something more along the lines of Costco ( COST ) at 1.05x.
But forgetting about sales for a moment, how does Amazon’s EV/EBITDA compare to Microsoft? Here’s a 10-year chart: Data by YCharts At just shy of 24x, Microsoft is more expensive than Amazon, at about 23x.
How about p/OCF?
27.4x for Microsoft and 26.8 for Amazon. Again, Amazon wins. TL;DR?
Don’t value Amazon on p/e. They intentionally suppress earnings (and taxes) by reinvesting in growth. As long as they continue to grow revenue 20-35% annually, this strategy shouldn’t be questioned. Instead of p/e, focus on other metrics which cut through the accounting games and reveal the true profitability […]
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