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Amazon Stock: Still a Buy?

By Daniel Sparks – Nov 23, 2021 at 8:05AM

Key Points

  • Amazon is benefiting from operating leverage, leading to rapid earnings growth.
  • Earnings are expected to grow faster than profits over the next five years.
  • Amazon is seeing broad-based growth across all of its major business segments.

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Or is it time to take profits?

Shares of Amazon.com (AMZN -2.02%) 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.

Various charts on an chalkboard and on a smartphone.

Image source: Getty Images.

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.

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.

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