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Why I think Amazon shares are undervalued

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Amazon (NASDAQ: AMZN) shares have been one of the best performing investments to own over the past two decades. Those who were savvy enough to buy the stock in September 2001 and continued to hold them for the next two decades have seen a return of 47,000%. That’s not a typo.

In the past five years alone, the stock has added more than 360%. And over the past 12 months, it has returned 8%. 

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But even after this impressive performance, I think Amazon shares still appear to offer value. 

Growth potential

Over the past decade, Amazon’s grown from an online bookseller into one of the world most valuable and powerful companies. And it’s no longer just an online retailer.

The group owns one of the largest airlines and logistics networks in the world. It also operates one of the largest cloud computing businesses in the world and is fighting for market share with Facebook and Google in the digital advertising market. 

As it’s entered new markets and double down on existing markets, Amazon has defied all of its doubters. I think this will continue. 

Amazon has an excellent track record of innovation. It’s always looking for the next big thing and has the money and impetus to follow through with developments. 

Sure, some projects, such as the Amazon phone, have failed spectacularly. But the company hasn’t let these failures hold it back. The company’s investments in logistics and technology have allowed it to outperform competitors. Some competitors are starting to fight back, but they’ve a lot to catch up on. 

Still, as competitors fight for market share, I think Amazon’s growth will moderate, both at its retail and technology divisions. The company is a financial powerhouse, but so are Facebook and Google. They have the financial resources to fight back.

Competition authorities also pose a threat to Amazon shares. Policymakers could break up the company if they think it has too much market power. This might actually be a positive development for the group, as the individual businesses will have more flexibility. 

Amazon shares are undervalued

Whatever happens to the company over the next few years, I think the organisation will remain a force to be reckoned with

The stock also looks cheap compared to the company’s potential. It’s currently changing hands at a price-to-sales (P/S) ratio of just 4. To put that into perspective, other online retailers such as Etsy and eBay are selling at P/S multiples of 12 and 4.5 respectively.

Meanwhile, the company’s main competitors in the internet arena, Google and Facebook, are selling at a P/S ratio of 9 and 10 respectively.

These numbers suggest the stock’s cheap compared to its current situation and future potential. Based on this valuation and the company’s growth potential outlined above, I’d buy Amazon shares for my portfolio today as a long-term growth investment. 

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Etsy, and Facebook. The Motley Fool UK has recommended eBay and has recommended the following options: long January 2022 $1,920 calls on Amazon, short January 2022 $1,940 calls on Amazon, and short October 2021 $70 calls on eBay. 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.

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