Please ensure Javascript is enabled for purposes of website accessibility

Could Amazon Stock Still Be Undervalued?

By Daniel Sparks - Updated May 20, 2021 at 9:28AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Even at a $1.6 trillion market cap, there may still be significant upside ahead for the e-commerce giant's stock.

Priced at $3,230, shares of Amazon (AMZN 0.24%) are now trading only 9% off their all-time high. Investors who missed the opportunity to buy the stock at prices below $3,000 earlier this year may be kicking themselves.

But is it really too late to get in on this growth stock?

A closer look at Amazon stock shows that it's more conservatively valued than it might seem on the surface.

Boxes in an Amazon fulfillment center.

Image source:

Incredible momentum

Sure, Amazon's price-to-earnings ratio of 61 may seem high at first glance. But investors should take a step back to appreciate how rapidly the e-commerce and cloud computing giant's business is growing. The company's staggering growth easily justifies the stock's premium valuation.

In the first quarter, Amazon's sales soared 44% year over year to $108.5 billion. Operating income more than doubled, rising from $4 billion in Q1 2020 to $8.9 billion.

Importantly, Amazon's momentum is coming from both of its core businesses: e-commerce and cloud computing.

Amazon's consumer-facing sales, which are largely comprised of its e-commerce business, grew 50% year over year on a currency-neutral basis internationally and 39% in North America. Meanwhile, Amazon Web Services (AWS) revenue jumped 32% year over year.

"During COVID, we've seen many enterprises decide that they no longer want to manage their own technology infrastructure," explained Amazon CFO Brian Olsavsky in the company's first-quarter earnings call. "They see that partnering with AWS and moving to the cloud gives them better cost, better capability and better speed of innovation. We expect this trend to continue as we move into the post pandemic recovery."

So don't be fooled by Amazon's size -- the company is still growing at an incredible pace.

Significant earnings growth potential

Also supporting the stock's premium valuation is its strong earnings growth potential. Thanks to the operating leverage inherent to its business model as the company continually benefits from its growing economies of scale, Amazon's operating margin has been steadily rising. This has led to earnings growing much faster than revenue.

Analysts seem to be banking on further operating leverage in the coming years, as the current consensus analyst estimate calls for Amazon's earnings per share to grow at an average annualized rate of 38% over the next five years. This sort of earnings growth would likely easily justify the stock's current price.

It's not surprising to see analysts forecasting strong earnings growth for the foreseeable future because Amazon's operating margin is expanding rapidly recently. On a trailing-12-month basis, it has expanded from 5.2% at the end of 2019 to 6.6% today. Longer term, it wouldn't be surprising to see this key metric reach 10%.

While there are always risks to investing in any stock, an analysis of Amazon's business momentum in relation to its stock's valuation does suggest shares still appear attractive today -- even at $3,230.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned, Inc. Stock Quote, Inc.
$140.98 (0.24%) $0.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.