US Stocks

Why Amazon shares could be significantly undervalued

Amazon (NASDAQ: AMZN) is a leading e-commerce and recently cloud-based solutions giant through its segments Amazon.com and Amazon Web Services (AWS).

Because of investor sentiment changing across the entire stock market due to the possibility of interest rate hikes later this year, many stocks, including Amazon shares (NASDAQ: AMZN), have seen a price decline. For Amazon, this is over 15.1% year-to-date.

Most of these declines have very little to do with the fundamentals, but instead the perceived value of many stocks right now. Although, that could change rapidly as many companies will be reporting quarterly results over the next few weeks. Amazon’s fourth-quarter results will be revealed on February 3.

Since Jeff Bezos resigned as CEO, many investors are now left wondering where the direction of Amazon will go in the multiple quarters to come. This can be seen as the excitement vanished judging by the stagnant share price ahead of the decline.

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Upcoming Quarterly Results

According to Yahoo Finance, the average analyst estimate expects revenues of $137.7 billion and earnings per share (EPS) of $3.74. These numbers mean that analysts expect an overall increase in revenue year-over-year, but a substantial decrease in EPS.

When comparing Amazon’s third-quarter operating expenses from 2020 to 2021, there was a sizable increase of over 17%. Analysts could be expecting a deceleration in overall online consumer spending, though this is very short-term as e-commerce continues to take away more market share from in-person retail stores over time.

Another reason could be that analysts doubt the potential of Amazon’s cloud-based service for businesses AWS in the short-term, although it’s unlikely as it’s been a massive growth driver for the company.

Although, a lot of these worries could easily disappear if Amazon decided to raise the price of its Prime Membership as it has become an essential source of stable income for the company. It’s unlikely that many customers would cancel their subscription, especially if they are utilizing the service to its fullest.

Valuation

Right now, Amazon’s valuation is mind-blowingly low.

There are various ways to value Amazon, but the two most important ways are price-to-earnings (P/E) and price-to-sales (P/S). Amazon’s P/E ratio currently stands at 59.3 while its P/S is at 3.40.

To fully understand how undervalued Amazon is currently, we can use multiple analysts’ full-year revenue estimates for 2022 and compare it to Amazon’s current market capitalization of $1.46 trillion. The average estimate is $553.2 billion which would give Amazon a P/S ratio of nearly 2.65.

For a company that expects to grow revenue and earnings steadily, it’s fair to assume that Amazon’s present value is undervalued. If the market continues to fall, Amazon will become terminally undervalued, assuming that the fundamentals continue alongside analyst estimates.

Conclusion

Despite the market selloff, investors should try to remain confident in Amazon heading into the fourth quarter. It seems as though bad news has already been priced into the stock, but time will tell.

There have not been many negative fundamental changes to Amazon that would cause the overall business to decline, but investor sentiment seems to be negative. Because of this, Amazon’s valuation has come down significantly, which may indicate a great opportunity for investors to buy shares at a discounted price.

Overall, Amazon remains a stable and reliable company right now more than ever.


Not Investment Advice Indie Investor is for general information use only. It must not be relied upon by readers when making (or not making) their investment decisions. If in doubt you should seek advice from a professional financial adviser.

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