Amazon’s Record Stock Gains Are Over
The actions of Amazon.com (AMZN) look frothy, and the last few times the stock has reached its current valuation, it suffered a significant pullback. The e-commerce giant’s shares are currently trading near their all-time high and are also trading at historically high valuations. If the past serves as a guide to the future, then its current valuation suggests that Amazon’s shares may already have peaked in 2018 and could decline by 10 percent.
On average, Amazon shares have traded at a one-year price-to-sell ratio of about 2 since the beginning of 2015, with a standard deviation of about 0.34. That puts the valuation in a range of 1.67 to 2.35 times the one-year forward sales estimates. Amazon shares are currently trading at 2.42 times 2019 sales forecasts of $ 283.36 billion, causing the shares to overvalue on a historical basis.
With Amazon never fully focused on boosting the bottom line and increasing profits, it’s hard to use a traditional measure of a profit multiple to value the corporate giant.
The chart above shows that the one-year forward price-to-sale ratio has acted as a pretty good measure of Amazon’s valuation. The chart shows that every time the one-year forward price-to-sale ratio rose above 2.35 in the past, Amazon saw a decline in its share price.
You can also see that the valleys in the Multiple have also been steadily increasing, which means that on each lower move, the market is discounting Amazon shares less than on the previous occasion, which could be the result of the company’s accelerated revenue growth and improving gross profit margins. Amazon’s revenue has increased in each of the last three years, from 20 percent in 2015, to 27 percent in 2016 and nearly 31 percent in 2017.
Revenue is expected to continue to grow at a blistering rate of about 31 percent in 2018, and by 21.5 percent in 2019. It’s hard to imagine Amazon’s shares falling too sharply from their previous levels. (See also: Oracle’s Plan to beat Amazon, Microsoft in the cloud.)
But if the ratio simply returns to the uptrend, as it has in the past, the forward sales multiple could fall to about 2.15. And that would cause the market capitalization to drop from about aproximadamente 682 billion to $ 610 billion, a drop of about 10 percent.
Although predicting how far Amazon shares could fall from their current price is not an exact science, the market is apparently stating quite clearly that 2.4 times next year’s forward sales are expensive enough. And if that’s the case, Amazon’s shares may have peaked in 2018, unless the company can convince the analyst community that its 2019 estimates are too low, which could allow that multiple to reset.