E-commerce giant Amazon.com (AMZN 1.30%) is on a roll. Its investors have enjoyed a market-crushing 64% return in 12 months, 280% over three years, and a 510% five-year gain. Does this rocket ride have any fuel left, or should investors leave Amazon alone until the red-hot stock cools down a bit?
Yes, Amazon shares are pricey
Let's just agree that Amazon shares always look expensive by nearly any valuation metric.
Today, you can buy Amazon shares for 265 times the company's trailing earnings, 109 times its free cash flows, or 28 times Amazon's book value. These ratios have permanent seats in Wall Street's nosebleed section. Even if you stretch for Amazon's strongest measure of profitability, the stock still looks overvalued at an enterprise value of 46 times EBITDA profits.
On the other hand, the behemoth keeps growing like a hungry start-up despite a $788 billion market cap and $193 billion in annual revenue. Amazon's top-line sales have doubled in three years, while EBITDA profits tripled and adjusted earnings skyrocketed 560% higher:
AMZN Revenue (TTM) data by YCharts.
Investors tend to pay a premium for growth trends like these, and it's rare to see extreme growth figures paired with a business of truly massive scale. Amazon ticks both of those boxes, so the seemingly overvalued stock keeps moving upward.
You get what you pay for
As long as Amazon keeps up its exciting growth trends, the stock should stay buoyant. As unlikely as that might sound, I don't see any reason to doubt that CEO and founder Jeff Bezos can keep the good times rolling for the foreseeable future. The company has a lot of proven and potential growth drivers available.
- The Amazon Web Services cloud computing platform is growing even faster than the online retail operations, and at much richer profit margins. In the recently reported first quarter of 2018, AWS sales increased 49% over the year-ago period while global e-commerce revenue rose by 27%. The segment contributed just 11% of Amazon's total sales but accounted for $1.4 billion out of $1.9 billion in total operating profits.
- It's a big world out there and Amazon has a lot of international growth left to do. Overseas operations collected just one-third of Amazon's first-quarter retail revenue and reported an operating loss due to the costs involved in building a brand and a corporate infrastructure in brand-new markets.
- The recent buyout of high-end grocery chain Whole Foods Market shows that Amazon isn't afraid to spend billions of dollars on new ideas. The company could follow up with other types of physical retail stores or entirely unexpected business ideas. Remember that the Whole Foods buyout came as a surprise to most investors, and AWS looked like a silly little hobby a decade ago.
These qualities should keep Amazon's top and bottom lines growing for the long haul. Eventually, that growth will start to slow down and Amazon's valuation ratios will then adjust to more normal multiples. But that day is not today, and Amazon shares still deserve their growth-based premium pricing.
This may not be every investor's cup of tea, but I think you'll miss out on some solid multiyear returns if you stay on Amazon's sidelines today.
