Amazon (NASDAQ: AMZN) stock has been an amazing wealth generator in the past. If I had invested $5,000 in the US-listed online shopping company 10 years ago, that money would now be worth about $40,000. Had I invested the same amount of money 20 years ago, it would now be worth around $330,000.
Right now, however, Amazon shares are out of favour. At present, they’re around 40% below their all-time highs. Is this an amazing opportunity for long-term investors? I think so. This is one of the most dominant companies on the planet and it has a long growth runway ahead of it.
Amazon is just getting started
Reading Amazon’s 2023 letter to shareholders recently, I was reminded of how much growth potential this company still has.
Take online shopping sales, for example. Amazon is already an absolute monster in this space. Last quarter, sales from online stores and third-party seller services amounted to around $100bn.
Yet today, around 80% of retail sales globally still take place in physical stores. This suggests that Amazon can grow its e-commerce sales significantly from here. Rising sales from third-party sellers should help.
It’s a similar story with cloud computing revenues. Last quarter, the cloud division, Amazon Web Services (AWS), generated revenue of around $21bn.
Yet according to Amazon’s CEO Andy Jassy, 90% of global IT spending today still takes place ‘on-premise’. So, this side of the business can get much bigger too.
Digital advertising is a third area of growth for Amazon. It has an edge here due to its machine learning technology. This helps customers see relevant information, which in turn, delivers strong results for brands.
There are many other growth drivers for the company. Looking ahead, areas such as artificial intelligence solutions, digital healthcare, self-driving cars (the company owns Zoox), music and video streaming, electronic payments, and smart home technology could all make major contributions to revenues and earnings.
So, I expect the company to keep growing in the years ahead.
Look beyond the high valuation
Now, even after the recent 40%+ share price fall, Amazon stock is expensive.
Currently, analysts expect the company to generate earnings per share of $1.56 for 2023. That puts the forward-looking P/E ratio at about 70, which is a lofty valuation.
But here’s the thing. Amazon is currently in cost-cutting mode, and if it can cut costs significantly, we could see earnings per share surge in the next few years. This would result in the stock looking a lot cheaper.
It’s worth noting that analysts expect earnings per share of $2.54 next year, which translates to a P/E ratio of a more reasonable (but still relatively high) 40.
Of course, the high P/E ratio here does add risk. If Amazon misses earnings expectations in the quarters ahead, I’d expect the stock to be volatile.
Yet, the way I see it, focusing heavily on the valuation here is not the right approach. Amazon has always been an expensive stock and the high valuation hasn’t stopped it from delivering life-changing returns for shareholders in the past.
And while its shares have experienced some wild fluctuations over the years (and will most likely continue to do so), pullbacks of this magnitude are rare. So, I think now is the time to be buying.
