Amazon.com (ticker: AMZN) stock joined a select club by hitting the $1,000-per-share mark this week for the first time. The tech giant joins companies like Alphabet ( GOOG, GOOGL), Priceline Group ( PCLN) and Berkshire Hathaway ( BRK.A, BRK.B), among a few others, who have reached the $1,000 barrier at least once.
Amazon has been on a tear in 2017. The stock is up 30 percent, and is up a staggering 1,500 percent since 2009, when the stock market began its current eight-year climb. In April, AMZN reported revenues of $35.7 billion, with earnings of $1.48 per share. Sales rose by 23 percent during the three-month reporting period, and its cloud-based business services skyrocketed by 42 percent for the quarter.
It’s also worth noting that AMZN’s stock price has split three times since the company’s initial public offering 20 years ago — in 1998 (a two-for-one and three-for-one split, respectively) and in 1999 (a two-for-one split).
FANG stocks lead the way. If the past really is prologue, as is often the case on Wall Street, there’s a good case to be made that Amazon is undervalued.
[See: 7 of the Tech Stocks to Buy in 2017.]
“We’re not surprised Amazon and Alphabet are testing the $1,000 price point,” says James Wang, a research analyst for ARK Invest’s actively managed ARK Web X.0 exchange-traded fund ( ARKW). “The FANG stocks continue to rally due to consistent double-digit revenue growth despite their large scale, defying the law of large numbers.”
FANG is an acronym for four large-cap growth stocks — Facebook ( FB), Amazon, Netflix ( NFLX) and Google.
Wang says that most people professional investors believe fast-growing tech stocks, like Amazon, are overvalued, but he thinks the opposite is true. “For example, the S&P 500 trades at a [price/earnings-growth ratio] of 2.9 — far above the generally considered fair value of 1,” he says. “Facebook, by contrast, has a PEG of 0.5 and adjusted for earnings growth, Facebook trades at one-fifth of the market average.”
Internet companies currently account for 10 percent of the market capitalization of the Standard & Poor’s 100 index, Wang says. “We believe next generation technologies like artificial intelligence and blockchain have the potential to push this toward 20 percent over the next decade,” he says.
Others say Amazon’s seemingly unique ability to blend high-concept technologies into the lives of ordinary Americans on an everyday basis must be factored in when discussing the firm’s future growth prospects.
“Artificial intelligence, preemptive marketing and a barely-tapped international market are just three of the many reasons that Amazon is just now hitting the upsweep of its growth potential,” says Krista Fabregas, an analyst at FitSmallBusiness.com, who closely tracks Amazon. “By successfully injecting itself seamlessly into everyday life at home and elsewhere, Amazon makes its business to know what you like, what you want, as well as where and how you do things.
“Through this business model, Amazon is driving toward one goal — to deliver whatever you need better than anyone else,” Fabregas says. “So far, it’s reached close to $1,000-per-share by targeting the U.S. consumer on a 2-to-1 ratio over all international shoppers. As it begins to tap international markets with the same determination, its value could easily rise again by half.”
The only scenarios where Fabregas sees AMZN stock declining is a not-so-likely perfect storm of cataclysmic events. “Being a highly leveraged company, Amazon’s stock could tumble in a perfect storm of crippling cyberattacks, loss of market euphoria, and forced liquidation via margin calls,” she says. “But I’m sticking with the glass half full on this one since so far, Amazon comes out of every dip on the crest of the next wave.”
Looking at Amazon in a different light could be another path to profits for investors who view the tech giant as undervalued.
“While retail has been a dismal sector so far this year — with names like Target ( TGT), Macy’s ( M) and Kohl’s ( KSS) down over 20 percent already — Amazon has been the beneficiary,” says Liz Miller, president of Summit Place Financial Advisors in Summit, New Jersey.
[See: 9 of the Market’s Best Growth Stocks.]
Miller says too many investors continue to think of Amazon as a technology stock, but it’s more appropriately the leading retail stock in the S&P 500. “What is abundantly clear this year is that while traditional retail is nearly crumbling, consumers have not reduced their discretionary spending,” she says. “They are increasingly transitioning to shopping exclusively on the internet. Amazon is a prime beneficiary of this growth because the company almost single-handedly created this trend.”
The case for Amazon being overvalued. But other Wall Street observers say Amazon’s amazing run is likely unsustainable, due to a combination of tougher competition and the high likelihood the company is due for an operational and strategic stumble or two.
“I believe Amazon is overvalued,” says Joe Sterf, founder of Pennsylvania-based AverageJoeFinance.com, a personal finance site geared to helping millennials manage their money.
Most experts that say it’s undervalued base their analysis double-digit projected growth rates, Sterf says. “Anything dealing with projected growth rates is fraught with risk. These rates assume Amazon will continue to execute perfectly and that no competitors will challenge them, even though major players like Walmart ( WMT) and Target are constantly trying to take back market share.”
Sterf also points out that Amazon is currently overvalued, based on fundamentals. It has a price-earnings ratio of 187 while the average P/E of the S&P 500 is about 25. “So yes, Amazon is growing faster than the S&P 500, but I wouldn’t pay over seven times the average stock to buy it,” he says. “Walmart, Amazon’s main peer, only has a P/E of 18. Given these comparisons and the fact that Amazon stock is up over 30 percent on a year-to-date basis, I would wait for a pullback before buying any shares.”
That said, hitting the royal $1,000 mark is a significant achievement, the Wall Street version of Tom Brady winning five Super Bowls or the Beatles landing 17 No. 1 worldwide hits. These marks aren’t crested often, and with good reason.
But that doesn’t mean investors should go “all in” on Amazon — not until they’ve done their due diligence, talked to a financial pro, and can sleep at night with significant cash steered to a high-flying stock.
[See: 9 of the Most-Loved Stocks in the Trump White House.]
Because you know the old saying — the bigger they are, the harder they fall.
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Even at $1,000, Amazon May Be a Steal originally appeared on usnews.com
