The 'Other' Amazon P/E Ratio

| About: Amazon.com, Inc. (AMZN)

Summary

I examine a deeper metric of earnings to be used in valuation calculations.

Owner earnings I believe more accurately measures the value of a company.

Using my newly minted POG ratio, Amazon's valuation is cheaper than that of its competitors.

In this article, I will be addressing the misconception that Amazon (NASDAQ:AMZN) is expensive. One of the constant knocks on the company is that investors always look at the sky-high P/E and think the stock is overvalued. Even if you adjust for growth and use the PEG ratio, investors would still say Amazon is expensive. However, I believe there is a third and more accurate measure of valuation, and I call it the POG ratio.

POG Ratio Explained

The "P" in the POG ratio is simply the most recent closing price, just like the P/E or PEG ratio.

The "O" in the POG ratio I find on Gurufocus, which one of my go-to resources when looking up information on stocks. The "O" stands for owner earnings per share, which is an item that I found to be extremely helpful and is located in the first section on the financials page for a stock. The definition of Owner earnings, according to Gurufocus below, I believe more accurately accounts for measuring the value of a business compared to reported earnings.

"Reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges...less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included."

[Gurufocus Owner Earnings Definition]

The "G" in the POG ratio is the same as in the PEG ratio, which is the estimated long-term growth rate.

Putting it all together...

As you can see in the table below, I calculated the POG ratio simply by inputting the current price, owner earnings per share from Gurufocus and the estimated long-term growth rate from Zacks. The formula is very simple: (Price/Owner EPS) / Est. LT Growth. However, for the POG ratio, just like the P/E ratio or PEG ratio, it is pretty much useless unless there is reference to compare to.

POG Calculation

AMZN

Price

$765.98

Owner EPS

$13.71

P/OEPS

55.87

Est. LT Growth

35.00

POG Ratio

1.60

Click to enlarge

Amazon POG Peer Comparison

Amazon competes on a number of fronts with a number of different companies, which include Microsoft (NASDAQ:MSFT) in the cloud, Netflix (NASDAQ:NFLX) for streaming, Wal-Mart (NYSE:WMT) for selling consumer goods and the list goes on. In the table below, I have calculated the POG ratio for Amazon, its competitors above, as well as other select large companies in the PowerShares QQQ Trust ETF (NASDAQ:QQQ). As you can see in the following table, Amazon has the cheapest valuation compared to its direct competitors MSFT, WMT and NFLX. Only Apple, when using the POG ratio, is more attractively priced than Amazon is right now. When using the POG ratio, it is easy to see why shares of Amazon have continued to increase and are playing catch-up to the valuation of its competitors.

AMZN

MSFT

WMT

NFLX

FB

AAPL

GOOG

Price

765.98

57.96

73.76

97.03

125.15

107.48

782.22

Owner EPS

13.71

2.14

6.04

-3.09

2.31

9.12

20.1

P/OEPS

55.87

27.08

12.21

-31.40

54.18

11.79

38.92

Est. LT Growth

35.00

7.73

4.34

23.75

31.30

8.68

16.41

POG Ratio

1.60

3.50

2.81

-1.32

1.73

1.36

2.37

Click to enlarge

[Table Data from Gurufocus and Zacks as referenced and linked to above.]

Data Table 2

For a reference and comparison, I compiled the POG ratios from above, as well as the traditional P/E ratio and PEG ratio for each of the above companies. The high P/E ratio and high PEG ratio for Amazon stand out in comparison to its competitors, which is the thing that worries many investors who are wary of paying that multiple.

AMZN

MSFT

WMT

NFLX

FB

AAPL

GOOG

POG Ratio

1.60

3.50

2.81

-1.32

1.73

1.36

2.37

Traditional PE

190.1

28.1

16.3

303.2

60.2

12.5

30.3

PEG Ratio

5.43

3.64

3.75

12.77

1.92

1.44

1.85

Click to enlarge

Closing Thoughts

In closing, I believe using the POG ratio, which is constructed with owner earnings per share, gives a better picture of the true value of a company. I have shown that when using the POG ratio, Amazon is undervalued compared to its competitors even though it is in the leading position in the market, which means there could be even further upside in the stock. For those who are afraid of the high P/E of the company, I would recommend reading a recent article by fellow author Anton Tyumin, where he covers an interesting derivative play which Amazon holds a stake in.

Disclosure: I/we 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.