Amazon P/S Valuation Suggests Short Term Upside

  • Amazon is currently trading at a two year low P/S multiple raising hopes of a bull run following the recent carnage across the momentum stocks.
  • The stock could be in for a bull run over the next three to six months, given its historical trade-off from such low P/S multiples.
  • We continue to reiterate a negative long term outlook on Amazon given the high valuations and risks due to the uncertainty of earnings at the company.

Amazon short term upside on the cards

Amazon (NASDAQ:AMZN) has been a momentum stock trading as an outlier to the traditionally accepted ranges of stock valuation metrics, be it the price-to-earnings (P/E) multiple or the price-to-sales (P/S) multiple. At its current valuation multiples of LTM (Last twelve months) P/E of 492 and LTM P/S of 1.83, Amazon continues to lie outside the comfort zone of a value investor. It is worth noting that the stock has historically defied orthodox valuation measures for over a decade now. So where could the stock be headed to following its latest fall of 22% in the year-to-date? Let’s find out below.

Amazon: P/S valuations are at historical lows

Amazon, as a company has been highly inconsistent on the bottom line while being focussed on topline growth. Given the company’s focus on revenue growth, we can value the company based on the price-to-sales multiple rather than the price-to-earnings multiple. Let’s take a look at the chart below which displays the 10 year Price and P/S multiple of Amazon.  You can now check fundamental stock charts for all your favorite stocks like AMZN, PCLN, all the way up to the last 10 years.

AMZN 10 year Price to Sales high low

Amazon has traded at an average P/S multiple of 2 for a major part of the last decade. The company hit a 10 year high P/S of 3.14 on Oct 1 2007 and fell to its lowest value of 0.88 on Nov 17, 2008. Let’s now take a deeper look at the 2 year movement and range of Amazon’s P/S multiple, which is displayed in the chart below.

Amazon 2 year historic Price to sales ratio

Amazon’s P/S multiple has again hovered around an average value of 2 over the two years with a high of 2.65 in early 2014 and hitting a two year low of 1.75 on April 2014. The stock’s current P/S multiple of 1.83 is closer to its two year low, and let’s now understand what are the prospects that lie ahead of Amazon’s stock holders.

The chart below displays the highs and lows of Amazon’s P/S multiple for the last 10 year and Last 5 year periods and the stock price performance in the following 3 and 6 months following the high low valuation points.

10 year high low P/S ratio and following 3 and 6 month performance

Date P/S value Stock price Following 3 month return Following 6 month return
8-Oct-07 3.16 93.51 -59.9% -55.4%
17-Nov-08 0.88 37.37 65.0% 103.2%

5 year high low P/S ratio and following 3 and 6 month performance

Date P/S value Stock price Following 3 month return Following 6 month return
30-Nov-09 2.77 139.08 -14.9% -9.8%
27-Feb-12 1.71 180.27 19.1% 35.3%

The price performance is interesting and decisive. The stock price has blasted off every time its P/S multiple has traded close to 1.7 or lower, leaving investors with extraordinary gains. On the other hand every peak in the P/S multiple has been followed by a steep correction which is evident in the table above. The relationship between the P/S multiple and stock price performance has been validated by the stock performance following the recent high hit in early 2014. The table below gives the stock performance in the three months following a two year high P/S multiple of 2.65, hit on Jan 21, 2014.

Year-to-date year high low P/S and following 3 month performance

Date P/S value Stock price Following 3 month return
21-Jan-14 2.65 407.05 -18.7%
8-May-14 1.7 288.32 ?

The stock hit a two year low P/S multiple of 1.7 on May 8 2014, which brings us to one conclusion. Amazon investors could be in for a good run over the coming few months. We see a huge likelihood of a short term upside over the next three to six months following the recent corrections across the broad markets.

While the short term looks promising for an investor at Amazon, we continue to reiterate our negative long term outlook with concerns regarding the extremely high valuation multiples of the AMZN stock and current uncertainty of profits. Given its current LTM P/E of 484, we would stay away from this stock until a fair degree of safety of earnings and earnings growth can be established. We currently rate Amazon stock 2.2/5.

To see Amazon’s latest stock price movement, click here (NASDAQ:AMZN)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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