Amazon Trades At Expensive Valuations, Here's Why Upside Potential Still Exists 1

Valuations

Amazon’s shares are currently trading at expensive valuations compared to its peers. This can be judged from the company’s one-year forward price to earnings multiple (or PE) and its price to sales ratio. The price to earnings ratio compares the company’s current market price to its earnings per share.

E-commerce is a promising growth industry and companies in this industry currently trade at an average one-year forward price to earnings multiple of 42x. Such high price to earnings multiples implies risky companies.

Hence, investors prefer to use the price to sales ratio as well when comparing internet stocks. This is because these stocks are valued on their growth potential rather than their current earnings. Additionally, their earnings are highly volatile, making the price to earnings multiple unreliable. Investors should thus consider the price to sales ratio in conjunction with the price to earnings to value an internet sector stock.

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Amazon (AMZN) trades at a price to sales ratio of 3.1x and one-year forward price to earnings multiple of 50.1x. In 2016, the company generated revenues of $136 billion and earnings per share of $5.

Its peers eBay (EBAY), Alibaba (BABA), Vipshop Holdings (VIPS), JD.com (JD), and the Latin American e-commerce company Mercadolibre (MELI) currently trade at a one-year forward price to earnings of 15.1x, 26.8x, 14.2x, 65.4x and 39.4x respectively. Their price to sales ratios are 4.1x, 13.7x, 0.98x, 1.3x, 11.9x respectively.

Thus, both on the basis of price to earnings and price to sales ratios, Amazon is currently expensive. However, growth in its international businesses will act as a catalyst for its stock.

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