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E-commerce giant Amazon.com (NASDAQ:AMZN) is on a roll. Its investors have enjoyed a market-crushing 64% return in 12 months, 280% over three years, and a 510% five-year gain. Does this rocket ride have any fuel left, or should investors leave Amazon alone until the red-hot stock cools down a bit?
Yes, Amazon shares are pricey
Let's just agree that Amazon shares always look expensive by nearly any valuation metric.
Today, you can buy Amazon shares for 265 times the company's trailing earnings, 109 times its free cash flows, or 28 times Amazon's book value. These ratios have permanent seats in Wall Street's nosebleed section. Even if you stretch for Amazon's strongest measure of profitability, the stock still looks overvalued at an enterprise value of 46 times EBITDA profits.
On the other hand, the behemoth keeps growing like a hungry start-up despite a $788 billion market cap and $193 billion in annual revenue. Amazon's top-line sales have doubled in three years, while EBITDA profits tripled and adjusted earnings skyrocketed 560% higher:
Investors tend to pay a premium for growth trends like these, and it's rare to see extreme growth figures paired with a business of truly massive scale. Amazon ticks both of those boxes, so the seemingly overvalued stock keeps moving upward.
You get what you pay for
As long as Amazon keeps up its exciting growth trends, the stock should stay buoyant. As unlikely as that might sound, I don't see any reason to doubt that CEO and founder Jeff Bezos can keep the good times rolling for the foreseeable future. The company has a lot of proven and potential growth drivers available.
These qualities should keep Amazon's top and bottom lines growing for the long haul. Eventually, that growth will start to slow down and Amazon's valuation ratios will then adjust to more normal multiples. But that day is not today, and Amazon shares still deserve their growth-based premium pricing.
This may not be every investor's cup of tea, but I think you'll miss out on some solid multiyear returns if you stay on Amazon's sidelines today.
Amazon is not on our top "Buy" list, but these 10 stocks are
Investing geniuses David and Tom Gardner just released their best stocks to buy now -- and it could pay to listen. Especially when you consider their average stock pick is up 353% vs. a mere 81% for the S&P 500.
They just shared what they think are the ten best stocks for investors to buy right now to members inside their service Motley Fool Stock Advisor… and Amazon wasn't one of them! That's right -- they think these 10 stocks are even better buys
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