You’ve heard the rebuttal for over two decades now: Amazon (NASDAQ:AMZN) is expensive at a p/e of 50-80 or whatever it is at a given moment. Even as it hovers almost 24% below its high, this p/e mantra may be the most frequented comment here on Seeking Alpha regarding this stock. For example, last week in an article about the “market crash is likely only beginning,” I wrote this:
One of the replies was this:
AMZN p/e is still 57, hardly cheap. This younger generation of "buy the dip" "investors" has never experienced a true crash.
As someone who invested during the first dot-com bubble and afterward, clung to the Graham and Buffett value methodology, I too fell for that argument. Eventually I finally got it; Amazon actually makes respectable profits, however they shield it from taxes by reinvesting. This distorts their p/e.
Yes, it looks like Amazon has miniscule operating margins, but when you add back the R&D spending – which is reinvestment in growing the company – you realize that actually, their operating margin typically hover around 10% or more. Much better than the low to single digit percentage which gets reported.
If they wanted to bolster their earnings, they could tone down the growth spending and bring down their p/e. As an investor though, you don’t want this right now given that they continue grow revenue in the ballpark of 30% annually and an ROE of 20-30%.
While not my first choice, the price to sales, or enterprise value to revenue, are probably the most cited alternatives for valuing this company. Here’s how that currently looks:
At around 3.2, Amazon is around its 5-year low. During the 5 years preceding that, it averaged in the low to mid 2s. The bearish argument would be that therefore, the stock has 33% downside. The bullish rebuttal would be that it’s a vastly different business now vs. then.
AWS, which is the most valuable part of the company, should trade at a 9-12x if it were a stand-alone. That's my personal opinion, however some suggest a 20-30x multiple.
The retail side should be <2x and perhaps even around 1x, if you want to compare to South Korea’s Coupang (CPNG). If comparing to Walmart (WMT), you could make the case for 0.5 to 0.75x.
Per their most recent 10-Q, their AWS segment produced $16.11 billion in revenue, compared to $65.56 billion for everything else in North America and $29.15 for everything else international.
Whatever multiple you deem is appropriate for each segment (AWS and everything else), when you marry the two together, you realize that 3.2x combined is relatively low.
My favorite metric for valuing Amazon is enterprise value to EBITDA, which is earnings before interest, taxes, depreciation, and amortization.
Over the past 10 years, Amazon’s EV/EBITDA has ranged from 22.85 to 50.74. Its median is 34.25 (per GuruFocus). What is it currently?
21.87 per YCharts and GuruFocus reports 22.85. Pick your source and it's either at or quite close to the 10-year low.
I also like using operating cash flow for gauging Amazon’s value (or lack thereof) at any given time. Right now that sits at the lowest quartile of the last 13 years:
So how does Amazon compare to Microsoft (MSFT) on these metrics?
Unlike Amazon, Microsoft's p/s just keeps creeping higher.
Even though it’s 12.75x, of course it would be foolish to suggest it’s 4x more expensive than Amazon. Microsoft is almost entirely a software company, SaaS at that, and doesn’t have the capital intensive needs of Amazon retail. The warehouses, logistics, competitive pricing, and the nearly 1.5 million employees all but guarantees you should be valuing the retail side to something more along the lines of Costco (COST) at 1.05x.
But forgetting about sales for a moment, how does Amazon’s EV/EBITDA compare to Microsoft? Here's a 10-year chart:
At just shy of 24x, Microsoft is more expensive than Amazon, at about 23x.
How about p/OCF?
27.4x for Microsoft and 26.8 for Amazon. Again, Amazon wins.
Don’t value Amazon on p/e. They intentionally suppress earnings (and taxes) by reinvesting in growth. As long as they continue to grow revenue 20-35% annually, this strategy shouldn’t be questioned. Instead of p/e, focus on other metrics which cut through the accounting games and reveal the true profitability of this behemoth.
Since everyone has different financial situations, I never tell people to buy anything. However, I will tell you what I’m doing for myself.
I like to buy things when they are out of favor. I hate chasing stocks. After the covid plunge in early 2020, I built up my weighting in energy to about 25-30%. Since the S&P’s weighing is 2-3%, you could say I was 10x overweight vs. market. I had another 20% or so in REITs, meaning about half my equity exposure was to these two sectors alone.
In 2021 that paid off. Energy was the best performing sector. Real estate was near the top, too. Both handedly beat the market.
Do I feel 2022’s tech is comparable to 2020’s deals for energy and REITs? No, not even close. However, tech multiples overall are back to pre-covid levels. Still expensive relative to the early and middle of last decade, but at least they’re not a total rip-off today like they were during 2020 and much of 2021.
Also, I have a different opinion than these many articles I saw Sunday morning on Seeking Alpha:
Obviously I could be wrong but I strongly feel this is a correction, a much needed one at that, and not the big one. Given all the negativity, I would not be surprised to see us bottoming around here.
So far in 2022, I have doubled my position in Amazon, including adding 33 shares on Friday alone. In addition, I have taken or significantly added to almost all of my other positions in tech. Amazon may not be like buying Exxon Mobil at $35, but it’s still a deal today nonetheless and, by far, the only big tech name I think is undervalued. Google (GOOG) is fairly valued but not the bargain that Amazon is.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of AMZN, CPNG, XOM, WMT, ESTC, GOOG either through stock ownership, options, or other derivatives. 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.
Additional disclosure: I am not a financial advisor. This article is general information and for entertainment purposes only. It should not be misconstrued as being investment advice. Please do you own due diligence regarding any stock directly or indirectly mentioned in this article. You should also seek advice from a financial advisor before making any investment decisions.