On August 5, 2023, Amazon.com Inc (AMZN, Financial) recorded a daily gain of 8.27%, with its Earnings Per Share (EPS) (EPS) standing at $1.27. This article aims to answer a vital question: Is Amazon.com (AMZN) significantly undervalued? To do this, we'll delve into a comprehensive valuation analysis of the company. We invite you to read on for a more profound understanding of the company's intrinsic value.
Company Overview
Amazon.com Inc (AMZN, Financial) is a leading online retailer and one of the highest-grossing e-commerce aggregators, with $386 billion in net sales and approximately $578 billion in estimated physical/digital online gross merchandise volume in 2021. Retail-related revenue represents approximately 80% of the total, followed by Amazon Web Services' cloud computing, storage, database, and other offerings (10%-15%), advertising services (5%), and others. International segments constitute 25%-30% of Amazon's non-AWS sales, led by Germany, the United Kingdom, and Japan.
With a stock price of $139.57, Amazon.com Inc (AMZN, Financial) is trading below its fair value (GF Value) of $202.13. This GF Value suggests that the stock is significantly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on the GF Value calculation, Amazon.com (AMZN, Financial) appears to be significantly undervalued. With a current share price of $139.57 and a market cap of $1.4 trillion, Amazon.com's stock is likely to yield a much higher long-term return than its business growth, given its significant undervaluation.
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Amazon.com's Financial Strength
Before investing in a company, it is crucial to evaluate its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage provide excellent insights into a company's financial strength. Amazon.com's cash-to-debt ratio stands at 0.46, which is lower than 51.32% of companies in the Retail - Cyclical industry. The overall financial strength of Amazon.com is 6 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. Amazon.com has been profitable for 8 of the past 10 years. Over the past twelve months, the company had a revenue of $538 billion and an Earnings Per Share (EPS) of $1.27. Its operating margin is 2.54%, ranking lower than 56.68% of companies in the Retail - Cyclical industry. Overall, Amazon.com's profitability is ranked 8 out of 10, indicating strong profitability.
Growth is a critical factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Amazon.com is 21.9%, which ranks better than 83.33% of companies in the Retail - Cyclical industry. However, the 3-year average EBITDA growth rate is 0.5%, ranking lower than 66.89% of companies in the Retail - Cyclical industry.
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Amazon.com's ROIC was 5.3, while its WACC came in at 11.3.
Conclusion
In conclusion, the stock of Amazon.com (AMZN, Financial) shows every sign of being significantly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks lower than 66.89% of companies in the Retail - Cyclical industry. To learn more about Amazon.com stock, you can check out its 30-Year Financials here.
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