Amazon Valuation!

Dear Reader,

US stocks are on a tear. I forecast they will go up for 1-2 years more without a correction of more than 15%.

Here, I will make an attempt to explain and forecast the valuation of Amazon.

The valuation of Amazon has dumbfounded financial markets experts since, basically Amazon's existence. At Price-to-Earnings Ratio 284 Amazon screams overvaluation. But is it overvalued? Let's take a closer look.

Two are the main drivers of a stock's value - return on equity and growth. The return on equity of Amazon is virtually nonexistent, because, well, the company doesn't make money, or small amounts compared with its huge revenue of above 135 billion USD. So Amazon's high valuation must be all down to growth and the hope that somewhere in the future the incessant growth of the online commerce and respectively Amazon's revenue will bring large profits and dividends. This seems an OK hypothesis since the online shopping market grows at rates higher than 10%. However, this hypothesis has driven the Amazon's high valuation for 15 years or more. And there are still no large profits on the horizon. How long can this continue?

Personally, I believe Amazon's stock is about 20-30% overvalued. Amazon subsidizes prices of the products it sells, so it keeps its market share through low prices. If the company stops doing that, its market share and revenue could fall or at the very least stop growing so quickly. I believe 800 USD is a good target price for Amazon, compared with Amazon's current price of above 1125 USD.

A growth driver for Amazon has been its cloud business Amazon Web Services. But the company keeps putting its overall profits in product subsidies and business development. The software cloud market should be a huge business and Amazon is leading the pack. So if the company starts making and distributing more profit to shareholders it can grow into its valuation. But for now, I am sticking with my value of Amazon's stock of 800 USD.


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Kind regards,
Petar Posledovich