Is Amazon Still a Bargain After AI Investment News and a 12.2% Rally?

• Ever wondered if Amazon.com’s towering share price still hides real value, or if the crowd has already bid it up too far? Let’s dig in together and see if there’s more to the story than meets the eye.
• Amazon’s stock has risen 5.7% over the last week and is up 12.2% over the past year, signaling both growing optimism and some shifting perceptions about potential risks and opportunities.
• Fueling these recent moves, news about Amazon’s expansion into new international markets and fresh investments in artificial intelligence have grabbed headlines. The company’s ongoing initiatives in logistics and cloud services are also attracting renewed investor attention and offering more reasons for the market’s uptick.
• On the numbers front, Amazon.com currently scores a 5 out of 6 on our valuation checks, meaning it looks undervalued on almost every metric we track. We’ll break down how valuation models stack up, but stick around because the best way to understand what Amazon is really worth may surprise you at the end.

Find out why Amazon.com's 12.2% return over the last year is lagging behind its peers.

Approach 1: Amazon.com Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates a company’s intrinsic value by forecasting its future cash flows and discounting them back to the present using a required rate of return. This approach helps investors assess whether a stock is undervalued or overvalued based on long-term cash generation potential.

For Amazon.com, the most recent figures show Free Cash Flow (FCF) over the last twelve months of $40.04 Billion. Looking ahead, analysts project robust growth, with Amazon’s FCF estimated to reach $141.87 Billion by the end of 2029. Notably, analyst consensus provides specific forecasts for the next five years, and further projections out to 2035 have been extrapolated using financial modeling techniques.

Relying on this two-stage Free Cash Flow to Equity model, the calculation arrives at an intrinsic value of $302.50 per share. Compared to the current market price, this implies the stock is trading at a 22.9% discount. According to the DCF analysis, Amazon is considered undervalued at today’s levels.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Amazon.com is undervalued by 22.9%. Track this in your watchlist or portfolio, or discover 913 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Amazon.com.

Approach 2: Amazon.com Price vs Earnings

For profitable companies like Amazon.com, the Price-to-Earnings (PE) ratio is a well-established way to assess valuation. This metric helps investors determine how much they are paying for each dollar of earnings, which is a crucial factor when companies are generating consistent profits.

It is important to remember that what is considered a “normal” or “fair” PE ratio can vary quite a bit. Companies with higher expected growth rates or lower risk profiles typically command higher PE multiples. In contrast, industries facing challenges or slower projected growth often trade at lower averages.

Currently, Amazon.com trades at a PE ratio of 32.6x. In comparison, the average for the Multiline Retail industry is 20.0x, and Amazon’s peer group averages 35.0x. While Amazon’s multiple sits just below its peer average, it remains well above the industry standard. This reflects the market’s view of its unique growth prospects and dominant market position.

This is where Simply Wall St’s “Fair Ratio” comes in. Calculated to be 36.8x for Amazon, this proprietary measure considers not just comparisons with peers, but also incorporates factors like expected profit margins, forward growth, risk, industry context, and company size. By synthesizing more data, the Fair Ratio provides a tailored benchmark for companies with Amazon’s profile.

Comparing Amazon’s current PE ratio of 32.6x to its Fair Ratio of 36.8x, the stock appears slightly undervalued based on earnings. Amazon’s share price is not just supported by growth expectations, but currently trades below the multiple one would expect given its prospects.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1437 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Amazon.com Narrative

Earlier we mentioned that there's an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is simply your story for a company. It is your perspective on where Amazon.com is headed, tying together your views on fair value, future revenue growth, earnings, and margins instead of focusing solely on the raw numbers. Narratives help you connect the company’s big picture and business drivers to a tailored financial forecast, which then leads to your own fair value estimate.

Narratives are easy to create and follow on Simply Wall St’s Community page, where millions of investors already share their outlooks and ideas. With Narratives, you can quickly see how your thesis compares to the current price, making it simple to decide whether it is time to buy, hold, or sell based on your own assumptions. In addition, because Narratives update dynamically every time there’s fresh news or new earnings, your investment framework can adapt in real time as new facts emerge.

For example, some investors believe Amazon’s overall mix of high-margin cloud and ads will drive strong profit expansion for years, so their Narrative yields a fair value of $294 per share. Others are more conservative, forecasting slower retail growth and valuing the company closer to $217 per share. Whatever your view, Narratives let you invest in the story you actually believe in.

For Amazon.com, we’ll make it really easy for you with previews of two leading Amazon.com Narratives:

🐂 Amazon.com Bull Case

Fair Value: $234.75

Undervalued by 0.7%

Projected Revenue Growth: 13.6%

• Highlights strong leadership in e-commerce and cloud services, with the belief that ongoing investments in AI and logistics support long-term expansion.
• Notes recent quarterly results and pipeline launches as reasons for confidence in Amazon's continued growth, but indicates that AWS growth and AI strategy are important to monitor.
• Projects substantial stock upside over the long run, with a fair value set slightly above today’s price, reflecting conservative modeling that may not fully capture new innovation and pipeline potential.

🐻 Amazon.com Bear Case

Fair Value: $222.55

Overvalued by 4.8%

Projected Revenue Growth: 15.19%

• Recognizes Amazon’s dominance across online retail, AWS, and advertising, but suggests that recent investments and suppressed cash flows mean short-term value is already reflected by the market.
• Observes that while long-term catalysts exist and cash flows are increasing, the current share price reflects most near-term growth, so the stock is considered fairly valued or slightly expensive today.
• Highlights risks from regulatory headwinds and a prolonged recession, while still acknowledging Amazon’s ability to adapt and execute its strategy over several years.

Do you think there's more to the story for Amazon.com? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com