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A 7% fall since the start of the year for Amazon (NASDAQ:AMZN) shares puts the stock in uncharted territory. Specifically, it’s trading at its lowest valuation multiple of the last 10 years.
The stock market is concerned about the implications of the firm’s spending plans. But investors who think the stock is never cheap might have their best buying opportunity in the last decade
Valuation
Amazon shares currently trade at a price-to-earnings (P/E) ratio of around 29. That’s not particularly low, but this isn’t the best multiple to use for investors looking to value the business.
The firm’s various investments mean its earnings are often subject to one-off adjustments. A good example is the loss it reported on its investment in Rivian Automotive in 2022.
Marking down the value of its stake in the electric vehicle business caused reported earnings per share to go negative. And this has a distorting effect on the P/E ratio.
By contrast, Amazon’s book value – the difference between its assets and its liabilities – has been much more stable. As a result, it gives a much better idea of the company’s intrinsic value.
The Rivian loss did affect the firm’s balance sheet in 2022. But overall, its book value was much more stable, making the price-to-book (P/B) multiple a much better metric to use.
At the moment, Amazon stock is trading at a P/B ratio of 5.4. That’s its lowest level in a decade and I think investors should take a serious look at the company as a potential buy right now.
Business strategy
I think Amazon might be one of the hardest companies to compete with in the world. A relentless focus on providing value to customers makes it incredibly difficult to disrupt.
The best example of this is the firm’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, isn’t what investors are worried about right now. They’re concerned about the prospect of a $200bn potential spend in 2026 and whether or not it’s going to be a good move.
It’s not as though Amazon has a perfect track record in this regard – that Rivian example illustrates this. But while $200bn is a big number, it’s important to keep it in context.
Microsoft is set to spend $150bn this year. And while its Azure business has been growing impressively, it’s still a smaller operation in terms of revenues than AWS.
In fact, as a multiple of Q4 2025 cloud revenues, Amazon’s spending is roughly in line with Microsoft’s. So while it’s a big commitment, it’s only in proportion to what’s going on elsewhere.
Be opportunistic
Investors often talk about wanting to buy shares in quality companies when they trade at bargain prices. But that involves being brave and being willing to invest when others aren’t.
There’s definitely some wariness around Amazon shares at the moment. But at its lowest price-to-book multiple in a decade, I think investors should see this as a possible opportunity.
