Image source: Getty Images
A 7% fall since the start of the year Amazon (NASDAQ:AMZN) shares put the stock in an undisclosed location. Specifically, it is trading at its lowest multiple of the past 10 years.
The stock market is concerned about the implications of a firm’s spending plans. But investors who think the stock isn’t cheap may have their best buying opportunity of the last decade
Measurement
Amazon shares currently trade at a price-to-earnings (P/E) ratio of about 29. That’s not the lowest, but it’s not the best multiple to use for investors looking to value a business.
The company’s diversified investments mean that earnings are often subject to one-time adjustments. A good example is the loss he reported on his investment Rivian Automotive in 2022.
Lowering the value of its stake in the electric vehicle business caused reported earnings per share to be negative. And this has a distorting effect on the P/E ratio.
In contrast, Amazon’s book value — the difference between its assets and liabilities — is more stable. As a result, it provides a better idea of the intrinsic value of the company.
Rivian’s loss impacted the company’s balance sheet in 2022. But overall, its book value was very stable, making price-to-book (P/B) the best metric to use.
Currently, Amazon stock trades at a P/B ratio of 5.4. That’s its lowest level in a decade and I think investors should take a close look at this company as a potential buy right now.
Business strategy
I think Amazon can be one of the most difficult companies to compete with in the world. An unrelenting focus on providing value to customers makes it very difficult to disrupt.
A good example of this is a company’s online marketplace. Its scale means it can offer levels of speed and convenience that no other business can even come close to.
That, however, is not what investors are worried about right now. They are worried about the prospect of spending around $200bn by 2026 and whether it will be a good move or not.
It’s not like Amazon has a perfect track record in this regard – that Rivian example shows this. But while $200bn is a big number, it’s important to keep it in context.
Microsoft it is expected to spend $150bn this year. And while its Azure business is growing impressively, it’s still a smaller operator in terms of revenue than AWS.
In fact, as the bulk of cloud revenue for Q4 2025, Amazon’s usage is almost on par with Microsoft’s. So while it’s a big commitment, it’s only relative to what’s happening elsewhere.
Have a chance
Investors often talk about wanting to buy shares in high-quality companies when they are trading at low prices. But that includes having the courage and willingness to invest when others don’t.
There is some caution about Amazon’s shares at the moment. But with the lowest price multiple in ten years, I think investors should see this as a potential opportunity.
