After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright, he’s being cautious of the valuation.

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I’m looking at the Amazon (NASDAQ:AMZN) share price, and I firmly believe that the business is very well-structured for long-term investment gains. However, there are times when it’s wise for me to buy more and times when it’s best I show restraint.

Right now, with its price-to-sales ratio around 3.3, I’m wondering whether the value opportunity that I capitalised on in 2023 is over.

Amazon’s relentless innovation

Most prominently, management has positioned the company to be one of the leaders in artificial intelligence (AI). It is managing this through a three-layered approach, including AI infrastructure, tools to build AI, and applications that leverage AI.

Also, the company is planning a foray into healthcare with disruptive projects like Amazon Pharmacy and Amazon Care. I think this could be a very high growth opportunity for the firm.

I’m also excited about how its logistics network will develop as AI and robotics evolve. It’s likely that drones will become more commonplace for deliveries, and robots could even be delivering packages to the doorstep. These implementations are likely to drive higher profit margins as the company relies less on human labour.

The value investor’s mindset

Despite my optimism about Amazon’s future, I still need to retain the right investment strategy to succeed with its shares.

I believe the best time to buy into a company is when others have been selling aggressively for quite some time, but the company’s long-term prospects still look good. This can happen for a variety of reasons, but in the case of Amazon, recently, a big price drop occurred because it reported a loss due to an investment in Rivian that has been losing value.

Now, the shares are nearing all-time highs again, up around 125% from the 2022 low. That means the big value opportunity is likely now over. This is further evidenced by the fact that the price-to-sales ratio was around 1.7 in 2022. Today, it’s 3.3, which is roughly equal to its 10-year median.

I still own the shares

While I think the major value play here is now over, I’m certain that the business’s future is still bright. That’s why I’m not selling my shares, I’m just unlikely to buy more at this stage.

In my opinion, there is quite likely to be a moderate correction in the share price soon. However, this likely won’t last very long. Certainly, over the next 10 years, I expect the investment to beat most major indexes like the S&P 500.

I just have to remember that because it’s so richly valued, any losses or slowdowns in business growth can bring serious periods of price volatility. And with Amazon’s core markets in Western economies largely saturated, it is more heavily dependent on international expansion for its gains now. This could be problematic if foreign economies are less responsive to management’s propositions than expected.

I like other investments more

I think there are stronger additions I can make to my portfolio right now, like buying more Alphabet shares. That’s another big tech investment involved in AI that I think offers both high future growth prospects and good value for money.

I consider Amazon to be a wonderful business, but I can’t justify increasing my position at its current valuation.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Oliver Rodzianko has positions in Alphabet and Amazon. The Motley Fool UK has recommended Alphabet and Amazon. 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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