In the world of investing, a cheap stock can mean different things. A stock that's cheap because the company is failing is obviously one to avoid. But being able to find quality businesses that are cheap relative to their actual value is the secret to outsize gains.
After the recent market sell-off, there are many companies in my portfolio that are much cheaper than they used to be. But Amazon (AMZN -0.18%) and Starbucks (SBUX -1.32%) stand out to me as cheap stocks that are currently a steal compared to their business performance.
With a share price over $3,000, it might seem strange to call Amazon's stock cheap. But with a price-to-sales (P/S) ratio of 3, it is trading at the same valuation it was in the early days of the pandemic. The company reported fourth-quarter 2021 earnings recently, and the results were impressive, making the company's valuation all the more appealing for investors.
Revenue was up 9% year over year, reaching $137 billion. Earnings per share (EPS) were $27.75, compared to $14.09 in the prior year. But the news that got investors excited had to do with the company's fastest growing segment, Amazon Web Services (AWS). In the fourth quarter, AWS had its largest-ever year-over-year revenue gain at 40%, and the segment is now operating at a run rate of $71 billion.
Amazon is already the leader in the cloud space, and with a secular growth trend expected to see cloud infrastructure more than double by 2026, the company should see this segment continue to dominate its business results.
There have also been rumors recently about Amazon having an interest in acquiring Peloton Interactive. While that may not come to fruition, it does point to Amazon's strong balance sheet. It ended the fourth quarter with $36 billion in cash and equivalents, giving management the flexibility to make acquisitions should they so desire.
Starbucks stock has been a bit of a roller coaster all through the pandemic as it felt the impact of lockdowns all over the world at various times. Shares are currently trading at a P/S of 4, which -- much like Amazon -- is a valuation not seen since mid-2020.
When the company reported its first-quarter 2022 results recently, there were good signs. Revenue was up 19% to $8 billion year over year, comparable-store sales rose 13%, and EPS was $0.69 compared to $0.53 in the first quarter of 2021.
However, there were also challenges. Margins compressed and the EPS results didn't meet the company's own estimate. While these results were due to a number of factors, COVID-related expenses are still affecting the business. Uneven results due to the pandemic have contributed to Starbucks' lackluster stock performance over the past year.
In spite of its challenges, Starbucks is still a strong company that's worth owning through these difficult times. On a two-year basis, the North American segment revenue was up 12% in the first quarter. Even with store closures and modified hours, this was the highest two-year increase ever, and the sixth quarter of sequential growth.
Starbucks is also seeing its rewards program take hold. In the first quarter, 53% of sales came from rewards customers, and 90-day active membership was up year over year by 21%. The company has shown it can weather the storm of the pandemic while also laying the foundation for what will come as we continue to emerge from the worst impacts of COVID.
The bottom line for investors
When the market sells off as it has over the past few months, it's a great time to look for strong businesses. By comparing current valuations to a company's historical average and recent history, investors can find compelling buying opportunities. Amazon and Starbucks are two such companies, and I'm happy to own them in my portfolio.