As discussed in detail in the nine previous articles in this series, the growth potential of Amazon.com, Inc. (NASDAQ:AMZN) is truly remarkable. A continuation of top line growth puts Amazon in a position to catch Wal-Mart Stores, Inc. (NYSE:WMT) as the largest retailer worldwide by sales in around 10 years. While this top line growth is fantastic, the big question for Amazon investors is (and has been for years) the stock's valuation. Here is a quick look at how Amazon stacks up against some of its closest rivals in a collection of standard valuation metrics:
|CAPS Rating||2 stars||4 stars||4 stars||5 stars||2 stars|
|Market Capitalization (in billions)||$122.4||$232.8||$40.0||$44.5||$15.1|
|TTM Price / Earnings||3,381.00||14.32||13.63||24.56||11.83|
|TTM Price / Sales||2.15||0.50||0.56||0.44||0.56|
|Price / Book||16.32||3.13||2.45||3.48||2.78|
|Free Cash Flow Yield||0.90%||3.61%||5.03%||3.23%||7.69%|
|Source: Motley Fool CAPS - 1/22/13|
If an investor looks at these numbers and nothing else, there is the potential to reach the conclusion that Amazon is wildly overpriced and is due for a significant correction. Before jumping to that conclusion, it is important to consider a number of additional factors. For starters, Amazon's TTM earnings includes a one-time impairment charge relating to the company's investment in LivingSocial that should be excluded in an evaluation of normalized earnings. More significantly, there are a number of reasons that Amazon can't be accurately compared to this peer group as discussed below.
Do not forget about growth!
The previous nine blog posts detailing Amazon's less-known growth opportunities were intended to drive home a point about Amazon's growth. To depict it more simply, here is a comparison of analysts' expected growth rates for each of the companies noted above over the next five years:
|Expected revenue growth rate - next year||27.8%||5.6%||4.6%||8.5%||2.2%|
|Expected earnings growth rate - next year||5,900%||9.3%||10.0%||11.3%||11.8%|
|Expected earnings growth rate - 5 years||32.6%||9.2%||11.7%||12.7%||13.3%|
|Source: Yahoo! Finance - 1/22/13|
With this comparison in mind, the expectation that Amazon's growth will remain stellar is certainly worthy of a premium over these large cap peers. Considering that Amazon's revenue is growing over five times faster than the average of this peer group, a price to sales ratio that is four times greater than the peer group seems a bit more reasonable. However, just layering expected growth on P/E and P/S ratios alone still does not quite validate the huge premium placed on Amazon shares.
There's more to the story
It is important to remember that Amazon.com, Inc. (NASDAQ:AMZN)'s business is nowhere near as simple as the peer group mentioned above (or any of the companies mentioned in this series). For example, Macy's, Inc.'s (NYSE:M) is a pure-play department store; while Amazon has built comparable e-commerce offerings for everything from apparel to cosmetics, this is just a fraction of what Amazon does. For example, Amazon is a leader in the rapidly growing cloud computing industry; aside from being a completely different business than Macy's, peers in this industry such as Rackspace Holdings and VMware, Inc. (NYSE:VMW) command huge valuation premiums with current price to earnings ratios of 106 and 54, respectively. This is just one example of how Amazon's high growth initiatives aren't comparable on an apples-to-apples basis with a brick and mortar discount retailer like Target Corporation (NYSE:TGT) .