E-commerce and technology mammoth Amazon (NASDAQ:AMZN) has captivated investors for decades. However, after climbing more than 50% in the last year amid excitement around the technology sector, many will be wondering how far it can go. I want to take a closer look at this giant of the market, determining whether there may be a few reasons to take profits in the near term.
The numbers
When a company sees a rally of more than 50%, I always start my analysis with a discounted cash flow calculation. This valuation method estimates a company’s future cash flows, and can indicate whether the market is getting carried away, or if there is still a good chance of more growth ahead. Impressively, the current share price may be as much as 41% undervalued based on this calculation.
Of course, this isn’t a guarantee. With so many different income streams, including cloud computing, investors often struggle to establish the best way to value such complex companies.
However, the price-to-earnings (P/E) ratio, which compares a company’s share price to its earnings per share (EPS), offers a clearer picture. Currently, the firm’s P/E sits around 56 times, significantly higher than the sector average of 34 times. This could indicate that shares in the company are trading at a premium compared to rivals. After such an extended rally, a share price that many think is too high could quickly lead to a sell-off and significant decline.
Limited potential?
Amazon’s aggressive expansion in e-commerce isn’t quite living up to the heady days of the past. Compared to this year, revenue growth is expected to slow by 20% over the coming year. Some analysts argue that the company faces increasing competition in the e-commerce space, particularly from TikTok Shop, which has been growing at an astonishing rate. But for me, impressive performance in other areas of the company, such as AWS, more than hedges against any potential retail slowdown.
Another factor I think could be a huge driver for the share price is the shift from growth to profitability. The company is now such a behemoth that expansion does not need to be the priority. Instead, the company may focus on driving down costs, executing in an efficient way, and enhancing offerings such as Prime Video.
Overall
For me, the Amazon share price still has a great future ahead, but may experience a few bumps in the road. The e-commerce business has perhaps seen it’s best days already, but with so many other services and platforms under the same roof, the firm isn’t far away from being the ‘everything platform’ that so many companies are looking to become.
As with many companies in the technology sector, the valuation may be high, but I feel that long-term investors still have a solid future with this one. I’ll be adding shares at the next opportunity.
The post Is the Amazon share price primed for a drop? appeared first on The Motley Fool UK.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
