Can Amazon continue to deliver exceptional market returns after nearing all-time highs at the end of 2024?
The e-commerce trailblazer Amazon (AMZN -0.11%) remains one of the few stocks I would consider acquiring at any point. Renowned investors like Warren Buffett emphasize that even outstanding companies should only be purchased at fair valuations. As we approach the end of 2024, Amazon’s stock has surged over 46% this year, trading just 6% below its all-time peak set a fortnight ago. The pressing question is whether Amazon still represents a worthwhile investment at these elevated prices or if it would be prudent to wait and reassess in 2025.
Evaluating Whether Amazon Stock is Overvalued
You may have heard this sentiment before: many analysts believe Amazon’s stock appears costly.
The online retail giant and cloud computing leader has climbed to impressive heights in the investment world. It stands among the so-called “Magnificent Seven” stocks, boasting a staggering $2.27 trillion market capitalization. Currently, shares are priced at 47 times earnings (P/E) and an astonishing 53 times free cash flow (P/FCF). There’s no escaping the conclusion that Amazon’s stock isn’t precisely a bargain at this moment.
Understanding Why Amazon Stock Always Seems Expensive
On the other hand, it’s worth noting that Amazon stock rarely presents itself as a good deal. Regardless of the valuation metrics applied, Amazon shares typically appear on the higher end of the spectrum.
The current price-to-earnings ratio is close to its lowest level in 15 years:
AMZN PE Ratio data by YCharts
From a historical standpoint, the cash flow ratio also appears low. Amazon stock seemed relatively affordable following the 2008-2009 subprime crisis and again when its cloud computing segment became profitable in the mid-2010s. However, the company also faced periods of depleted cash profits in 2013 and 2021 due to substantial investments in data center equipment, premium shipping services, and new headquarters.
Ultimately, Amazon’s average P/FCF over the last 15 years stands at a remarkable 108:
AMZN Price to Free Cash Flow data by YCharts
It’s worth noting the stock has historically produced outstanding returns. The S&P 500 (^GSPC -0.21%) experienced a 424% increase over the same 15-year period, while Amazon outpaced with an astonishing 3,070% gain:
AMZN data by YCharts
The Importance of Timing in Stock Purchases
It’s true that timing can significantly influence your investment returns. For instance, if you had acquired Amazon shares on the perfect day in June 2009, your returns could have soared to an impressive 5,550%. Such timing can indeed yield superior outcomes.
However, pinpointing those optimal buy-in moments is notoriously challenging. Even Warren Buffett concedes that he cannot foresee “what the stock market will do in the next six months, or the next year, or the next two.”
This uncertainty applies not only to the overall market but also to individual stocks. The most effective strategy for investors is to acquire shares of solid companies when it seems reasonable and then allow the underlying business to generate consistent growth and returns over time. This approach has proven successful for billionaires like Buffett and can work well for you too.
Considering an Investment in Amazon Stock Today
While this may not be the most opportune moment to invest in Amazon stock, it’s also not an unfavorable time to consider buying.
Looking ahead, Amazon is poised to benefit from a robust economy, the ongoing artificial intelligence (AI) surge, and its innovative drone delivery initiatives. As a top-tier innovator with a versatile business strategy, even though the stock may seem perpetually pricey, it has the potential to deliver remarkable returns over the years.
Therefore, while it’s advisable not to go all-in, putting all your resources into Amazon stock today may not be wise. Instead, consider initiating a modest position if you haven’t already, utilizing price-reducing strategies such as purchasing in thirds or implementing a consistent dollar-cost averaging plan.
The investment journey may have its ups and downs, but you certainly don’t want to miss out on the opportunity to benefit as Amazon continues to reward its shareholders with exceptional returns over the long term.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
