At a price-to-earnings (P/E) ratio of 44, the Amazon (NASDAQ:AMZN) share price doesnât obviously look like good value. But thereâs more to this one than meets the eye.
There are several reasons why I donât think the P/E ratio is a good way of evaluating this particular stock. And when I use what I see as a better multiple, it looks historically cheap.
P/E ratio
I donât think Amazonâs earnings are a good reflection of the economic value of the underlying business. This is partly due to the way its costs are reflected in its income statement.
An example is the companyâs investment in Rivian Automotive. In 2022, Amazon reported a net loss, mostly due to the effect of writing down the value of its stake in the electric van manufacturer.
Amazon EPS 2014-24
Created at TradingView
This implies the business lost money. And while it did lose more on its Rivian investment than it made elsewhere, this is a one-off cost that isnât likely to be repeated in the future.
As a result, Amazonâs P/E multiple has been extremely volatile. But I donât think the value of the underlying business has fluctuated as much as this, making the ratio an unreliable guide.
Amazon P/E ratio 2014-24
Created at TradingView
More generally, Amazon spends a lot on customer relationships. But even though this shows up in the income statement as an expense, itâs more like an investment than an ongoing cost.
As a result, I think the firmâs earning power is much higher than its consolidated accounts indicate. And thatâs why Iâm sceptical of the P/E ratio as a way of valuing the stock.
P/B ratio
I think comparing Amazonâs price to its equity â the difference between its assets and liabilities â gives a better picture of where the stock is in value terms. This is the price-to-book (P/B) ratio.
Unlike its earnings, the companyâs book value has been relatively stable over time. It has generally increased over time as the underlying business has grown, even in 2022.
Amazon Book value per share 2014-24
Created at TradingView
Right now, Amazon trades at a P/B ratio of just over 8. By itself, that doesnât mean much, but a look at where it has traded historically shows why I think thereâs an opportunity here.
Over the last 10 years, the stock has generally traded at a much higher multiple. Itâs only over the last couple of years that the P/B multiple has fallen below 10.
Amazon P/B ratio 2014-24
Created at TradingView
That implies investors have become less optimistic about Amazonâs ability to generate a return on its equity. But I donât think the business has ever been in a better position.
The companyâs size means it has never been more difficult to disrupt. And with AWS growing strongly and an emerging advertising division, I think Amazon looks like a real opportunity.
An investment opportunity?
With Amazon, Iâm not too worried about competitive threats from other businesses. My biggest concern is the possibility of it being disrupted from elsewhere.
Last week, the company had some success in fending off an antitrust lawsuit from the US Federal Trade Commission (FTC). But Iâd be surprised if investors have heard the last of this one.
Thatâs an ongoing risk for Amazon shareholders. But at historically low multiples, investors might wonder whether they’ve ever been better-placed to consider that risk in terms of valuation.
The post Why the Amazon share price could be an under-the-radar bargain appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Foolâs board of directors. Stephen Wright has positions in Amazon. 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.
