Opinion: Amazon is a cheap stock for long-term investors. These numbers tell you why

Despite its high traditional value for money rating, Amazon.com is a steal for long-term investors. And this may be the perfect time to consider making a purchase.

Let’s start with a Twitter post from May 13th:

Price-to-earnings ratio (P / E) is the current share price divided by the consensus estimate of earnings per share for the next 12 rolling months. If we pull forward our own 10-year P / E chart, based on consensus estimates among the analysts surveyed by FactSet, we can confirm Andreas Hansen’s observation:


The current forward P / E of 53.5 for Amazon.com Inc.
AMZN, -1.17%
is just above its low point in the last 10 years.

You could say that Amazon is expensive because its forward P / E is more than double that of the S&P 500 index
SPX, -0.85%
21.5. However, the forward P / E doesn’t take into account Amazon’s incredible growth rate.

If we look back over the past five full years, Amazon’s earnings per share have grown at an average annual growth rate (CAGR) of 101.8%. This corresponds to an EPS-CAGR of only 3.4% for the S&P 500.

What if we skip 2020 when Amazon made exceptional profits and reviewed 2016-2021? In this way we are bypassing the 2020 pandemic year and comparing it to the expected upswing this year:


This is a less extreme comparison, but Amazon’s expected five-year CAGR through 2021 is much higher than the index’s.

But enough with the review. We can look ahead and compare Amazon to other very large technology-oriented companies to get a better picture of how cheap its stocks are.

Amazon is on sale

A company’s PEG ratio is its price / earnings ratio. It is calculated by dividing a PER by the earnings per share CAGR.

To look at three years, we can use consensus earnings estimates for the calendar years 2021 and 2024. We use calendar years for the calculations to keep them consistent. Apple Inc.
AAPL, -1.12%,
for example, has a fiscal year that ends in September.

Using Apple’s example, the EPS estimate of the company’s 2021 consensus calendar among analysts surveyed by FactSet is $ 5.19 and the consensus EPS estimate for 2024 calendar is $ 6.05. Those numbers would give an EPS CAGR of 5.2% from 2021 to 2024. The stock’s closing price on May 17 was $ 126.27, so the P / E based on the consensus estimate for 2024 would be 20.9. The PEG ratio is the P / E divided by the CAGAR of 5.2 or 4.0.

Starting with the S&P 500, here are 2024 PEG ratios for the eight largest tech companies by market capitalization for which consensus EPS estimates are available for 2024.


Apple has the highest 2024 PEG rate among publicly traded companies as it has by far the lowest expected EPS CAGR.

Amazon is affiliated with Netflix Inc.
NFLX, -0.54%
for the lowest 2024 PEG ratio of 0.8. But Amazon seems even brighter with the highest expected EPS CAGR from 2021 to 2024.

Facebook Inc.’s
FB, -1.74%
The PEG ratio of 2024 is only slightly higher at 0.9. It has the lowest P / E based on consensus estimates for 2024.

According to Tesla
TSLA, + 0.18%
Even with the 16% decline this year, one could have expected the electric vehicle maker to have the highest PEG rate by 2024. But it is the second highest after Apple. Tesla also has the second highest expected EPS CAGR.

Think long term

Obviously, this is a very long-term view of stock valuations. This is reasonable, however, as equity investments (not trades) work best over longer periods of time. It’s easy to say that Amazon stock didn’t do anything for six months, and it’s true – stocks only rose 4.3% in the six months to May 17. However, in the previous six months they increased by 30%. And they have increased 15 times for 10 years.

Day-to-day or month-to-month, you cannot predict how a stock will perform as an investment. But if a company continues to grow rapidly while you hold the shares for many years, you have a good chance of making some cash.

Do not miss: These growth companies could be prepared for massive share buybacks

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