Amazon Prime Day might have offered a flurry of deals and discounts on all manner of goods, but analysts say the biggest bargain of all looks to be Amazon.com (AMZN) stock.
That might sound counterintuitive at first. Amazon stock gained about 30% on a price basis through the first half of 2024 – vs 19% for the tech-heavy Nasdaq Composite – to trade at record levels.
Ordinarily, the idea is to buy low.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But a sum-of-the-parts analysis of the company's underlying businesses suggests AMZN stock has much further to run, analysts say. Indeed, as a services company with rapidly expanding profit margins, upside from generative artificial intelligence (AI) and a track record of building large businesses from scratch, Amazon is really tough to beat.
"AMZN should be valued as a services company rather than a products company," writes Needham analyst Laura Martin, who rates shares at Buy. "Services revenue and margins (including advertising, subscriptions and cloud) are far larger and growing faster than AMZN's core e-commerce business. Services growth implies valuation multiple expansion owing to its high margins."
Multiple expansion, which is when folks are willing to pay a higher price today for expected earnings in the future, makes stock prices go up. Now you might think AMZN stock is already richly valued, seeing as it currently changes hands at more than 33 times the Street's 2025 earnings per share (EPS) estimate. But Amazon is forecast to generate average annual EPS growth of more than 23% over the next three to five years.
AMZN stock is cheap
In today's market, these are far from unusual valuations. According to data from LSEG Stock Reports Plus, Amazon is actually cheaper than the broader market when you look at how fast its stock price is rising compared to its growth prospects. Furthermore, Amazon stock trades at steep discounts to its own five-year average on both a forward and trailing price-to-earnings (P/E) basis. As for AMZN stock's price-to-sales (P/S) ratio, it trades essentially in line with its own long-term average.
Moreover, Amazon's valuation looks especially compelling when its already impressive potential for revenue growth and margin expansion is set to be turbocharged by artificial intelligence, experts note.
"We believe investors are underestimating AMZN's positioning to win its fair share of AI workloads and believe its platform approach will be a winning strategy over the long term," writes BMO Capital Markets analyst Brian Pitz, who rates AMZN at Outperform (the equivalent of Buy).
If nothing else, Pitz and Needham's Martin have a lot of company. Of the 61 analysts issuing opinions on Amazon surveyed by S&P Global Market Intelligence, 44 call it a Strong Buy, 15 say it's a Buy and two have it at Hold.
That works out to a rare consensus recommendation of Strong Buy for Amazon stock, and with high conviction to boot. Here's how Argus Research analyst Jim Kelleher (Buy) explains the Street's collective bullish outlook: "AMZN appears inexpensive amid the AI-driven rally."
This is kind of important because plenty of investors have avoided Amazon stock in the past based on concerns its valuation is too rich, and it looks to have been a mistake.
Amazon stock for the long run
Amazon, which began life as a modest website for book buyers, went public in 1997, and has since generated truly outsized wealth for shareholders. An analysis by Hendrik Bessembinder, finance professor at the W.P. Carey School of Business at Arizona State University, found that Amazon was one of the best stocks in the world over three decades.
After all, anyone who put $1,000 into Amazon stock 20 years ago has enjoyed truly market-crushing returns. For its entire life as a publicly traded company, AMZN has generated an annualized total return of more than 32%. The S&P 500, by comparison, returned not-quite 11% annualized, according to data from YCharts.
Put another way, since it debuted, Amazon stock has pretty much tripled the performance of the S&P 500.
Little wonder then that Amazon, which was added to the Dow Jones Industrial Average in February, is now the highest-rated name among all 30 Dow Jones stocks. Or check out analysts' top S&P 500 stocks to buy now, and you'll find Amazon is high on that list.
The bottom line on Amazon stock
Analysts say the company has a history of execution and is particularly well suited to cash in on AI.
"Given its indisputable franchise leadership, ability to leverage its vendor relationships in the retail space, and market dominance and superior growth in infrastructure-as-a-service, we believe that AMZN warrants long-term accumulation in most equity accounts," Argus Research's Kelleher writes.
Investors should initiate new positions or dollar-cost-average into existing Amazon positions on share price weakness, the analyst adds.
Related content
-
Stock Market Today: Stocks Rally Despite Rising Geopolitical TensionThe main indexes were mixed on Tuesday but closed well off their lows after an early flight to safety.
-
What's at Stake for Alphabet as DOJ Eyes Google's ChromeAlphabet is higher Tuesday even as antitrust officials at the DOJ support forcing Google to sell its popular web browser. Here's what you need to know.
-
Stock Market Today: Stocks Rally Despite Rising Geopolitical Tension
The main indexes were mixed on Tuesday but closed well off their lows after an early flight to safety.
-
What's at Stake for Alphabet as DOJ Eyes Google's Chrome
Alphabet is higher Tuesday even as antitrust officials at the DOJ support forcing Google to sell its popular web browser. Here's what you need to know.
-
Lowe's Stock Is Falling After Earnings. Here's WhyLowe's stock is lower Tuesday as Wall Street weighs a beat-and-raise quarter against declining revenue. This is what you need to know.
-
Why Walmart Stock's a Buy After Its Beat-And-Raise QuarterWalmart is the best Dow Jones stock Tuesday after the retail giant's solid earnings report and outlook and Wall Street thinks it's just getting started. Here's what they're saying.
-
Winners and Losers of Fed Rate CutsNavigating interest-rate changes can seem daunting, but these areas of the fixed-income market could perform better (or worse) than others.
-
Six Ways to Optimize Your Charitable Giving Before Year-EndAs 2024 winds down, right now is the time to look at how you plan to handle your charitable giving. The sooner you start, the more tax-efficient you can be.
-
How Preferred Stocks Can Boost Your Retirement PortfolioHigher yields, priority on dividend payments and the potential for capital appreciation are just three reasons to consider investing in preferred stocks.
-
Structured Settlement Annuity vs Lump-Sum Payout: Which Is Better?As the use of structured settlement annuities grows, it can be tough to decide whether to take the lump sum to invest or opt instead for guaranteed payments.
