Ignore Overvaluation Fears When It Comes to Buying Amazon Stock

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Amazon (NASDAQ:AMZN) is a growth story like none other, which continues to defy expectations. With the pandemic forcing people to stay indoors, sales have skyrocketed for the company. It’s outstanding execution, a pristine balance sheet, and an incredible outlook makes investing in AMZN stock a no-brainer.

If You Can Set Aside Its PR and HR Issues, You Should Buy Amazon Stock

However, investors feel that they’ve perhaps missed the boat when investing in the company. After all, just this year, AMZN stock gained over 90%. It continues to grow at a staggering pace pushing its valuation past the expected $2 trillion mark.

Price does not value, but if we look at some of the valuation metrics Amazon doesn’t seem to be overvalued. The company has plenty of room for future growth, and its valuation is justified at this point.

Recapping the Second Quarter

Amazon’s stellar second-quarter results are a testament to its excellent execution during the pandemic. Revenues beat estimates by over $7.5 billion, and so did earnings per share by 587%.

Perhaps the most impressive aspect for the company was its increased penetration of the grocery market. Amazon Fresh presents an enormous growth opportunity in the online grocery business with the company’s unique ecosystem.

Moreover, AWS sales were down this quarter, mainly because of belt-tightening measures implemented by major companies. Hence, lower IT/Cloud budgets resulted in a 2% drop in revenues compared to estimates.

Amazon Prime numbers are another positive for the company with several new additions this quarter. Worldwide streaming hours have doubled since the lockdown, mainly driven by Prime video. Expect a substantial increase in members during Prime Day which is rumored to be on October 13-14.

Valuation and Price Target

A lot of talks have gone on concerning Amazon’s current valuation. Investors worry that its price continues to get out of hand. However, as I mentioned before that price and value are two separate concepts.

The chart at the right shows two of the best valuation metrics, in my opinion, which perfectly illustrates this point.

We can see that the price to sales ratio for Amazon is, in fact, the lowest in comparison to its peers. Additionally, the PEG (price to earnings growth) ratio also suggests that the company is decently valued at this stage.

However, things are likely to change quickly as AMZN stock continues to grow at a healthy rate. It is currently trading at 13.5% lower than its mean estimates. Over the past 90 days, the price estimates for the stock have shot up 31.8%. Hence, the stock is trading at a hefty bargain at this stage, much to most investors’ surprise.

The Future

The pandemic will impact consumption trends permanently, accelerating demand for e-commerce, cloud computing, and other technologies. Naturally, Amazon is at the forefront of this surge and one of these tailwinds’ top beneficiaries.

The company has a robust ecosystem that continues to attract new customers and sellers to its platform. Its ecosystem is often characterized by a flywheel, which creates a ceaseless cycle over time.

Amazon continues to ramp up its facilities to meet the rising demand.  The company expects square footage to grow by 50% year-over-year in 2020, a huge step-up from the 15% estimates last year.

Additionally, the company is investing heavily in new growth drivers in various areas. Third-party seller services and subscription services are growing at double digits and are likely to be significant catalysts for future growth.

The company is also doing well in international markets, which bodes well for future expansion opportunities. Hence, it’s firing on all cylinders with multiple engines driving growth.

Final Word on AMZN stock

Amazon is an evergreen stock that has outperformed the market for the past several years. Contrary to what many investors believe, the stock is not overvalued and is trading at a discount. The company has laid the groundwork for growth over the next several years and will become an even bigger juggernaut in the future.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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