by winston » Thu May 30, 2019 2:02 pm
not vested
Amazon (AMZN)
Growth Stocks to Buy That Are Growing Into Their Valuation: Amazon (AMZN)
Forward P/E Multiple 5 Years Ago: 100
Current Forward P/E Multiple: 68
Stock Price % Gain Past 5 Years: 510%
Most Recent Quarter Revenue Growth Rate: 17%
Next up we have the king of growth stocks, Amazon (NASDAQ:AMZN). At one point in time, Amazon was considered a barely profitable, hyper-growth e-commerce giant with a sky-high triple-digit forward earnings multiple.
Today, the narrative has completely changed. Amazon is growing at a much more tempered rate. But, margins are sizable and quickly moving higher, while the valuation is rapidly falling.
What enabled this narrative pivot? A few things.
First, Amazon’s e-commerce business hit scale, and started turning a mild profit.
Second, Amazon built out the much more profitable Amazon Web Services business, and ramp in AWS has helped improve the company’s profitability profile.
Third, Amazon has also jumped into the digital ad world, which has very high margins, so ramp in digital ads has likewise boosted margins.
Overall, then, Amazon has leveraged scale and new, more profitable business ventures to dramatically improve the company’s profitability profile. In so doing, the company has powered robust profit growth over the past five years, the likes of which has allowed the forward earnings multiple to fall from 100 to 68, while the stock still rose by over 500%.
Going forward, this dynamic will persist. Ramp in higher margin cloud and digital ad businesses will continue to push margins higher.
Against the backdrop of ~20% revenue growth, that will spark huge profit growth. The multiple will keep falling, and the stock will keep rising.
Source: Investor Place
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