Amazon’s stock has become more attractive based on expected earnings and sales.
Amazon.com Inc. has long prioritized growth over profitability, leading to relatively low earnings as the company invested heavily in expansion. However, the recent broad stock-market decline has brought an interesting shift: After years of trading at high multiples relative to expected earnings, Amazon’s stock now trades at a forward price-to-earnings (P/E) ratio that is more in line with other large, successful companies.
Below are updated forward P/E and price-to-sales valuations for the largest U.S. companies, reflecting changes due to the recent market downturn.
Some Relief for Long-Term Investors
On Tuesday, the S&P 500 bounced back from a three-session decline with a 1% gain, offering a sigh of relief for investors. Despite a 0.8% pullback on Wednesday, the index remains 7.8% below its July 10 closing high, but still up 9% for 2024 (excluding dividends).
For those with long-term goals, it’s important to remember that large market swings are typical. Over the period from October 19, 1995, through May 17, 2024, the Russell 3000 Index experienced 51 declines of 7.5% or more, with an average drop of 14.2% over 55 days. However, these were matched by 51 increases of 7.5% or more, averaging a 21.3% gain over 145 days. Investors who stayed the course through downturns have typically seen positive outcomes.
How Valuations Have Shifted
Now, let’s focus on the largest components of the S&P 500. All 10 of these stocks have declined since July 10, leading to lower forward P/E ratios. For Amazon, the forward P/E ratio fell to 30 as of Wednesday’s close, down from 38.1 on July 10 and 41.7 at the end of 2023. Despite this decline, Amazon’s stock remains up 31% for 2024.
Compared to its five-year and 10-year average levels, Amazon’s P/E has decreased the most among these large companies. Investors who once accepted Amazon’s high P/E ratios may now see it as a value stock based on another key metric.
However, Amazon’s recent second-quarter results received a mixed response. While Amazon Web Services continued to show strong growth, total revenue fell short of expectations, likely reflecting broader economic pressures.
Price-to-Sales Ratio: A Bargain?
Amazon also stands out for its forward price-to-sales ratio, which is now lower than that of the S&P 500. Among the top 10 S&P 500 components, Amazon is one of only two companies trading below both its five-year and 10-year average price-to-sales ratios. The other is Tesla, which, despite high valuations, is priced lower relative to its sales.
In summary, Amazon’s P/E ratio has normalized after years of being exceptionally high, and its price-to-sales ratio suggests it may be undervalued in the current market. However, it’s essential to conduct your own research when evaluating any stock, considering the company’s long-term competitiveness and growth potential.
