Up more than 40% this year and over 280% in the last three years, there appears to be no end to the rise of Amazon.com Inc. (AMZN), and it looks like it’s going to stay that way for the time being. From the Supreme Court’s recent sales tax ruling that will hurt rivals to Amazon’s growing private-label business, the good news continues to roll-in for the e-commerce giant. Despite criticisms of being overvalued, BK Asset Management’s Boris Schlossberg thinks the e-retailer could rise another 20% to hit $2,000 before any kind of correction, according to CNBC.
“I read all these reports from all the analysts saying that it’s wildly expensive based upon all the normal metrics—price to sales, enterprise value to free cash flow—and I couldn’t agree more,” Schlossberg told CNBC last Wednesday. “But that’s not what Amazon trades on. It trades on one simple variable which is growth.”
Amazon’s Growth Value
Considering Amazon currently trades at a forward price-to-earnings ratio of 131.6 compared to the S&P 500's 17.1, it’s trading at a premium nearly eight times that of the broader market. But such a metric fails to incorporate growth, the key factor on which Amazon trades, according to Schlossberg.
Based on analyst estimates, Amazon’s earnings per share (EPS) growth is expected to be 175% for all of 2018. In comparison, consensus estimates for overall S&P 500 EPS growth stands at 22%, according to a report issued on Monday by Yardeni Research. Comparing price/earnings-to growth ratios (PEG ratio) reveals a different story than the one told by the P/E ratios alone: Amazon trades at a 0.476 PEG ratio compared to a PEG ratio of 0.789 of the S&P 500—a 40% discount. (To read more, see: Amazon is Best Long-Term Growth Story: MKM.)
Sales Tax Ruling
While the Supreme Court’s ruling last Thursday that allows states to collect sales tax on e-commerce companies that have no physical presence within the state initially appeared as a big blow to Amazon, experts are claiming the new ruling could actually help the dominant e-retailer secure a new source of revenue.
Since Amazon already collects sales tax on its own goods, the new legislation will actually be more harmful to third parties and small businesses that use Amazon’s platform to sell their own wares. Due to the complexities of learning new tax legislation and implementing new collection systems, Amazon could capitalize on the ruling by offering to implement a collection system for small businesses in exchange for a fee. (To read more, see: High Court Tax Ruling Won’t Curb Amazon Dominance.)
Amazon’s private-label business, AmazonBasics, all began around 2009 when the company began offering simple items that consumers could buy at a local hardware store at around 30% discounts to national brand name products. One such item was a battery, and in just a few short years, AmazonBasics had captured almost a third of online battery sales, according to a separate article by CNBC.
The success of private-label battery sales on such little effort was the initial spark that has since flourished into about 100 other private-label brands on everything from children’s clothing (Spotted Zebra) to dog food (Wag). With analysts predicting nearly half of all online shopping in the U.S. to be conducted on Amazon’s platform within the next several years, Amazon could more than double its revenue from its in-house brands, according to analysts at SunTrust Robinson Humphrey.