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Amazon's (NASDAQ:AMZN) valuation has been the source of much debate here on Seeking Alpha and other venues. Critics will argue that Amazon's outrageous price to earnings ratio is a reason why the stock is overvalued. Supporters of the stock reference its incredible growth rates as the reason the stock will climb ever higher. Putting emotion and biases aside, however, we can use operating cash flows as a more relevant way to value Amazon shares. As Amazon makes little to no GAAP net income, valuing the stock by the conventional price to earnings ratio is challenging and misleading.

It is important to note that I produced these charts by pulling Amazon's 10-Ks from the SEC website. The operating cash flows and net income are observed while I computed operating cash flow yields and earnings yields by observing the company's market cap on the financial statement dates. Earnings yield is defined as net income divided by market cap and operating cash flow yield is defined as operating cash flows divided by market cap.

Now, let's have a look at what I found. First, this graph shows Amazon's operating cash flows and net income for full years since 1999.

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We can see that nearly exclusively, operating cash flow is greater than reported net income. This supports the theory that Amazon is valued based upon cash flows and that investors largely ignore its PE ratio. We can see very impressive growth in operating cash flows since they were negative from 1999 to 2001, but have since exploded to over $4 billion last year. Net income, however, has stagnated and crested only $1 billion in 2010 and was actually negative last year.

This is the trouble with trying to value Amazon by the conventional PE method as the stock will always appear very expensive by this metric. Indeed, since, Amazon's full year 2012 GAAP earnings were negative, it technically doesn't even have a PE right now.

Next, we'll look at the same data points but view them a different way. This chart shows operating cash flow yields versus earnings yields for the same time period.

(click to enlarge)

The first thing that jumps out quite obviously is the enormously negative earnings yields from 2000 and 2001. Amazon experienced the double whammy of losing tons of money and a declining market cap that conspired to produce those horrifically negative earnings yields following the tech bubble bursting.

However, if we exclude those years and just look at 2002 to present, we get a more useable picture of these two values.

(click to enlarge)

Again, this is the same graph but I've excluded what I consider to be the outliers of 1999 through 2001. What we see here is quite a bit more instructive in terms of how the market values Amazon. As we can see, Amazon was valued in the early 2000's at an operating cash flow yield of roughly 4%. This means the stock was trading for 25 times operating cash flows. Then, during 2005 to 2010, we saw Amazon stock become much cheaper on an operating cash flow basis, briefly touching a 12% operating cash flow yield during the depths of the stock market decline in 2009. The value has since moderated to about 5% in 2012.

Finally, this graph shows us the cash flow multiple Amazon has traded for over the past 11 years.

(click to enlarge)

This graph shows the inverse of the operating cash flow yield graph in that it shows the CF multiple Amazon has historically traded for. Again, we can see that during the financial crisis, Amazon's CF multiple decreased to about 8, before rebounding to 20 last year.

The point to take away from all of this is that Amazon isn't nearly as richly-valued as is may appear at first glance. My take away from this data is that the market doesn't care about Amazon's price to earnings ratio as it has been quite meaningless throughout AMZN's history as a public company. The way the market values Amazon shares is through valuing the cash flows the company produces. If we assume this to be true, we can then extrapolate that Amazon is actually in the middle of the historical range of valuation.

This means that, even though AMZN is near its all-time highs, the company is still not overpriced based on historical patterns. In fact, if AMZN returns to 25 times operating cash flows, which is within the historical range for the stock, that could mean an additional $21 billion of market cap at last year's operating cash flow number of $4.2 billion. With the company currently valued at $119 billion, another 17% upside is within the realm of possibilities even without increasing cash flows. Of course, this is a two-way street and if the company's operating cash flow multiple falls to 15 again, we could see shares fall 17%.

Given the bull market that is showing no signs of slowing and the fact that Amazon is the darling of Wall Street, betting against Amazon shares here seems quite risky to me. While I don't buy companies that trade for 20 times their operating cash flows. The fact that the market is comfortable with this valuation for Amazon historically suggests that a valuation-based crash in the share is almost an impossibility. Of course, if Amazon stumbles in implementing its growth strategies for moving merchandise, Amazon Web Services, the Kindle line, etc., we could see shares with operating cash flow yields in the 8% to 10% range again. If this happens, shares may fall precipitously but again, given that Amazon has been given a free pass from Wall Street to miss estimates, lose money and generally have no plan to ever produce a profit, betting against Amazon here seems foolhardy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.