Shares of Amazon.com (AMZN -1.64%) have been rising nicely in recent weeks. Since the beginning of October, the stock has climbed more than 10%. This compares to the S&P 500's 8.5% gain over the same period. With the stock back over $3,570 for the first time since July, is the stock still attractive at this level? Or is this a good time for investors to take their profits?
A close look at Amazon stock reveals that selling shares at this level could be a mistake. Even more, the stock's valuation relative to the company's long-term prospects suggests shares may actually be a compelling buy at this level.
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Strong fundamentals
Amazon is seeing strong momentum across several important metrics, including e-commerce sales, cloud computing revenue, and more. Its broad-based momentum makes a great case for the e-commerce and cloud-computing company's business to continue growing both its top and bottom lines rapidly over the long haul.
Amazon's revenue for the nine months ending Sep. 30, 2021, was $332.4 billion, up almost 28% year over year. This nine-month view helps weed out some of the lumpiness of interesting comparisons for the company as it laps a year in which it benefited from elevated demand for e-commerce due to the COVID-19 pandemic. But this growth was notably driven by much more than e-commerce. It was also helped by a 36% jump in cloud-computing revenue from Amazon Web Services (AWS) and a 70% year-over-year increase in the company's "other" revenue, which is primarily comprised of Amazon's fast-growing advertising business.
An attractive valuation
But what about Amazon's sky-high price-to-earnings multiple of 70? A closer look at how the company's earnings are growing faster than its revenue thanks to the inherent operating leverage in Amazon's business model shows why this is actually a fairly low multiple in the context of Amazon's earnings prospects.
For instance, in the nine-month period that Amazon's revenue increased 28% year over year, its net income increased 35% -- and that was despite the major U.S. employer implementing billions of dollars in spending for COVID-19 safety measures. Not to mention labor and supply shortages plagued Amazon and its stakeholders during this period in a similar way they impacted many other retailers. Capturing the operating leverage that Amazon sees as its sales grow, the company's trailing-12-month operating margin in Q4 was 6.2%. This is up from 5.7% one year ago and 5.4% two years ago.
Looking ahead, analysts unsurprisingly expect huge growth in Amazon's earnings. The current consensus analyst forecast calls for Amazon's earnings per share to grow at a rate of 36% annually over the next five years.
Combining an expectation for Amazon's earnings to grow rapidly over the long haul thanks to the company's operating leverage with Amazon's broad-based business momentum across its major segments makes a great case for why shares are actually quite attractive at this level.
