It is easy to think that owning shares in Amazon (NASDAQ: AMZN) has always been a lucrative choice. Indeed, Amazon stock has soared 777% over the past decade. But, like any share, its price can go down as well as up. In the past couple of months, for example, the share price has dropped by over a fifth.
Step back even further, to the dotcom boom in 2000, and the performance was far worse. From early 2000, Amazon stock plummeted 90% by the next year. Long-term investors who held their nerve have been handsomely rewarded though.
Amazon shares could be bought for 30c each following the September 2001 US terrorist attacks. The price has risen 63,400% since then.
So could the recent fall offer me an attractive buying opportunity for my portfolio?
Going from strength to strength
The dotcom boom was a quarter of a century ago and Amazon has evolved massively since then. It has gone from being a fledgling business in an emerging industry to one that last year turned over $638bn – and made over a billion dollars a week on average in net income.
Over that period, it has also refined its business model enormously, from running its own air freight fleet to becoming a key cloud services provider globally.
In some ways though, I think the current market turbulence has some similarities to the tech crash of 2000. Excitement about artificial intelligence (AI) in particular has pushed some tech valuations to a high point — and they have now come crashing back down to earth.
Not a clear-cut bargain
What, then, about Amazon stock specifically? It currently trades on a price-to-earnings (P/E) ratio of 34. I do not think that is cheap.
For Amazon stock to surge another 777% over the next decade, the prospective P/E ratio (using current earnings) would be just under 300. That is the sort of crazy high valuation that brings to mind the dotcom boom (or Palantir, which currently has a P/E ratio over twice as high at 616).
But there is reason to believe that Amazon can grow its earnings per share strongly in years to come, just as it has in the past. At $5.66 last year, they were 383% higher than they had been five years previously.
Amazon benefits from what is known as a network effect. The more that customers use its site, the more useful it becomes to them and other customers due to a greater depth of reviews, economies of scale and customer understanding. That helps the company’s profit margins. Meanwhile, it continues to expand aggressively into areas including cloud services.
Based on its long-term potential then, I think the current Amazon stock price could ultimately turn out to be a bargain.
Not investing just yet
Still, a P/E ratio of 34 is higher than I am typically comfortable with when investing. Amazon’s complex international supply chains mean that US tariff uncertainty is a significant risk to future earnings. We do not know how long that may go on for.
So I would be more comfortable investing at a lower P/E ratio or with a clearer risk environment that hopefully will emerge in coming months. For now, I have the company on my wishlist, but not my shopping list.
