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  • Writer's pictureIshfaaq Peerally

Amazon Stock is Cheap

When I calculated the intrinsic value of Amazon $AMZN by using the discounted owner's earnings of the company, turns out it is cheap. Is it a good investment?

The owner's earnings of a company is the total amount of money that a company can in theory return to shareholders every year. But we also need to discount future owner's earnings since money today has more value than money in the future.

Despite the high revenues of $321 billion in the TTM of Amazon, the company only had $13 billion in net income since retailers normally have low profit margins. Even though, Apple $AAPL have comparable market cap to Amazon, it still makes money in one quarter than Amazon makes in a year. But Amazon is growing faster while Apple reached peak growth. For 2019, I calculated the owner's earnings to be about $14.5 billion.

Next, we will need to estimate future owner's earnings and we will do that by looking at the business segments of Amazon. Amazon has 3 business segments: North America, International and Amazon Web Services (AWS). Most of the profits of Amazon comes from AWS although it doesn't contribute that much to the revenues and internationally, Amazon is still losing money.

The main challenge that Amazon will face in the coming years is Antitrust probes as the company keeps growing.

Even if Amazon looks cheap considering the growth, when we look at the PE ratio of 100, it looks unstable. One bad news can tumble the stock and as the stock is highly correlated with the market $SPX500 , it is unlikely to fare off well in a market selloff. The bear market in March was an exception, it was a good news for Amazon. Next recession may not be the case.

That's why we always need to use a margin of safety. Amazon stock is in the same situation that Microsoft $MSFT was in 2000. The company was about to conquer the world and looked cheap but it had an unstable valuation with a PE ratio of 80. It crashed as the market was not willing to pay 80 times earnings anymore and took 16 years to recover. If you're going to own Amazon forever, it might be a good investment but if you are looking for gains in the coming years, I'll stay away. If you had invested $10 000 in Microsoft in 2000, you would have $35 000 today. But if you waited for the right price in 2009, you would have $137 000. That's the difference between making a profit and a fortune.

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