Key Takeaways:
- The 2-Minute Valuation Model values Amazon stock at $255/share in 2 years.
- That’s a potential 40% upside from the stock’s current price of around $185/share.
- Amazon is trading at its lowest P/E valuation multiple in the past 5 years but is still expected to grow earnings-per-share around 15% annually.
- Get accurate financial data on over 100,000 global stocks for free on TIKR >>>
Amazon’s stock is down 15% in the past 3 months, which means the stock might temporarily be undervalued.
Between the strength of AWS, the surprising growth of Amazon’s advertising business, and a renewed focus on profitability, Amazon looks well-positioned to keep growing and delivering strong shareholder returns.
Based on forward earnings and a reasonable valuation multiple, the stock could have 40% upside from today’s levels.
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What is the 2-Minute Valuation Model?
Three core factors drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized earnings-per-share (EPS), and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Amazon Looks Undervalued
Forecast
Analysts expect that Amazon will increase earnings per share between 15 and 25% annually over the next 3 years, with EPS expected to reach $9.39 in 2027.
That means Amazon is still growing fast:
In our valuation, we’ll estimate that earnings will grow at around 15% annually over the next 3 years with the stock reaching about $8.50 in EPS in 2027.
This earnings growth is likely to be driven by:
- AWS Expansion: Continued growth in cloud services with high margins.
- Advertising Revenue: Rapid growth in Amazon’s advertising segment.
- E-commerce Efficiency: Improvements in logistics and cost management.
- International Market Growth: Expansion into emerging markets.
- Subscription Services: Growth in Prime memberships and related services.
View Amazon’s full analyst estimates >>>
Valuation Multiple
Amazon has averaged a forward P/E multiple of about 64x over the past 5 years, as shown in the historical P/E chart.
That’s very expensive, but it was justified by Amazon’s high quality and growth.
Today, the stock is trading near its lowest P/E ratio in the past 5 years at about 29 times forward earnings.
This is a pretty reasonable valuation multiple for the stock considering analysts expect the company to see about 15-20% annual earnings growth going forward.
Still, the stock looks cheap because even at a reasonable valuation multiple, earnings are still growing rapidly:
We’ll use a conservative 30x forward P/E multiple in our valuation.
Fair Value
Using our 2-Minute Valuation Model and applying a conservative approach:
- Conservative 2027 EPS estimate: $8.50
- Conservative forward P/E multiple: 30x
Expected Normalized EPS ($8.50) * Forward P/E ratio (30x) = Expected Share Price ($255)
The 2-year expected share price we would get from this valuation is $255/share.
This would be a great outcome for the stock, considering the stock today trades at about $184/share.
The stock could have a 39% potential upside over the next 2 years, which would be nearly 18% annualized returns:
Keep in mind, this is just a valuation exercise, and we don’t know for sure what the stock’s price will be in the future.
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Analysts’ Price Target
Today, analysts have an average price target of about $258/share for Amazon stock today, which means that the 66 analysts covering the stock on average also believe the stock has nearly 40% upside today:
It’s pretty clear to see that analysts think the stock is undervalued. Additionally, the math supports it.
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Risks to Consider
While our valuation and analysts’ price targets suggest that Amazon is undervalued, investors should be aware of several risks:
- Economic Downturns: A recession could impact consumer spending and overall revenue.
- Increased Competition: Rising competition in e-commerce and cloud services may pressure margins.
- Regulatory Challenges: Potential antitrust actions and increased regulation could affect operations.
- Currency Fluctuations: International operations expose Amazon to foreign exchange risks.
- Supply Chain Disruptions: Global supply chain issues could impact product availability and costs.
TIKR Takeaway
Amazon’s diversified business model, strong growth in high-margin segments like AWS and advertising, and consistent earnings growth make it look like a compelling investment idea today.
The stock could deliver 18% annualized returns over the next 2 years due to the company’s 15% annual projected earnings growth.
Is Amazon a buy over the next 24 months? Use TIKR to check the stock’s 5-year growth forecasts and other financial metrics to see if the tech stock looks undervalued today.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
