Amazon.com Inc. (NASDAQ: AMZN) is arguably the best growth narrative among internet companies. For almost 20 years, Amazon has focused on growth with continued business expansions while paying little attention to profitability. In some years, the company made money and in others, it lost money. But with the capital it is able to put in place whenever needed through financing, Amazon has run its operations smoothly and free of any cash deficiency. The company may not have retained much earnings over the years, but it has certainly increased the scale of its business activities to a massive level, potentially planting the seeds to eventually churn out enough profits to maybe, at last, justify the hefty price-to-earnings (P/E) ratio of Amazon’s stock.
As of October 2018, Amazon had the second highest P/E ratio among the FAANG stocks at 138. Its P/S comes in at a more reasonable 4.06 (the lowest of the FAANG stocks) and is a more meaningful valuation metric for Amazon’s stock. Since January 2015, the stock has seen its sharpest rise moving from approximately $300 to its current price of $1,640 (as of February 2019). Nevertheless, the stock's price was consistently tracking the company's sales at a stable multiple of between one and three. If the P/S ratio is a reliable valuation metric, the future value of Amazon stock could likely depend on how much more growth the company might still be able to bring out along the way in terms of revenue. Some have suggested Amazon is going to be worth $6,000 per share in 10 years. This can be investigated based on Amazon's average rate of sales growth. The stock's past performance may also provide a clue as to the likely rate of the stock's price increase for the next 10 years. (See also: If You Had Invested Right after Amazon’s IPO)
Potential Growth Prospect
As of October 2018, Amazon has $208.125 billion in trailing twelve-month (TTM) revenue. Revenue has been growing at an annualized rate of 25.97% over the past three years. TTM gross margin is 24%. Its net income for the TTM is $300 million. Net income has a one-year growth rate of 28% and a net margin of 3%.
There is no guarantee that for the next 10 years Amazon can maintain its most recent annualized sales growth rate of 25% but we will use 25% as an estimate. Although companies typically do not maintain such high growth rates for so long, Amazon has been entering numerous new markets and regularly announcing new, innovative partnerships. In just the second half of 2018, Amazon announced plans to build new headquarters in New York City and Northern Virginia, that it will be launching a new partnership with the ABC reality series "Shark Tank," expanding the capabilities of Alexa and much more – so there is reason to believe in its extended revenue growth.
For purposes of the projection analysis we will start with $208.125 billion in trailing twelve-month (TTM) revenue and assume a 25% annual revenue growth rate with a steady P/S of 4. With these assumptions we get the following:
Keep in mind that P/S is calculated by using price in the numerator and revenue per share in the denominator.
The calculations show a one-year price target of $2,115 which is in line with analysts’ one-year price target of $2,170. With the 25% annual rate of sales growth Amazon could be worth $6,455 in 2024.
Future Stock Price
While $6,000 seems daunting, it could prove to become a reality. As the price gains, investors may want to also watch the values of the following highest priced stocks in the market which could present pressure for Amazon as its value increases.