2 Reasons Why Amazon's Stock Is Cheaper Than it Lookshttp://www.fool.com/investing/general/2014/02/01/2-reasons-amazons-stock-is-cheaper-than-it-looks.aspx Adem Tahiri
February 1, 2014
Few stocks, if any that I know of, get tagged with the "too expensive" label as often as Amazon (NASDAQ: AMZN). The conventional route for many "value" investors, may be to buy stocks with lower price-to-earnings multiples in the same space, such as eBay (NASDAQ: EBAY) or Overstock.com (NASDAQ: OSTK).
As I write this article, Amazon's stock is down 9% on a "sub-par" quarter that still showed 20% sales growth. Simply put--it was a good quarter, so why the drop?
Since Amazon misses most value investors short-list, only "shock the world" type growth can keep its stock price up.
It shouldn't, this is a stock that even value investors should consider. Here's why Amazon is cheaper than it looks.
Valuation metric: go beyond the P/E
Whether you applaud, or despise that decision, it's a well known fact. So what is a good tool to value Amazon by? In my opinion--sales.
The Price-to-sales ratio
Here's a look at how Amazon stacks up with both P/E and P/S to its peers.
Sure, Overstock.com still has a lower P/S ratio than Amazon, but it's hard to say it's cheaper because Amazon has so much intangible value. Amazon is a business that can win on many levels (with either products like Kindle, or from its sites) and is a "best of breed" business in e-commerce. You could argue that the success of eBay's Pay Pal unit makes it a "multi-level" performer as well, it does, but Amazon has the better growth rate and a cheaper P/S ratio than eBay.
The point isn't that eBay is a "bad" business or that it's expensive (it's neither of those things), the point is that Amazon is a whole lot cheaper than its own P/E (1,340) would lead you to believe.
In fact, the P/S ratio's of this group have remained eerily consistent over the past five years, as the chart below shows. This would suggest that despite the run-up in share price, and the higher P/E, Amazon is about as cheap (or expensive) as it's always been.
Brand leader + enormous addressable market = value
More than anything though, you must understand that this is a growth company. To me, you value a growth company in a relative manner, by assessing its addressable market.
Amazon is the undisputed leader in e-commerce, yet e-commerce still only makes up about 6% of all retail sales.