When you buy and hold a stock for the long term, you definitely want it to provide a positive return. Better yet, you’d like to see the share price move up more than the market average. But Amazon.com, Inc. (NASDAQ:AMZN) has fallen short of that second goal, with a share price rise of 45% over five years, which is below the market return. Looking at the last year alone, the stock is up 6.3%.
In light of the stock dropping 3.6% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company’s positive five-year return.
To quote Buffett, ‘Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace…’ By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
Over half a decade, Amazon.com managed to grow its earnings per share at 0.5% a year. This EPS growth is slower than the share price growth of 8% per year, over the same period. So it’s fair to assume the market has a higher opinion of the business than it did five years ago. And that’s hardly shocking given the track record of growth. This optimism is visible in its fairly high P/E ratio of 307.76.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We’re pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It’s always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. Dive deeper into the earnings by checking this interactive graph of Amazon.com’s earnings, revenue and cash flow.
A Different Perspective
Amazon.com shareholders are up 6.3% for the year. But that was short of the market average. If we look back over five years, the returns are even better, coming in at 8% per year for five years. Maybe the share price is just taking a breather while the business executes on its growth strategy. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example – Amazon.com has 2 warning signs we think you should be aware of.
We will like Amazon.com better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.
What are the risks and opportunities for Amazon.com?
Trading at 21.6% below our estimate of its fair value
Earnings are forecast to grow 36.93% per year
Profit margins (0.8%) are lower than last year (4.5%)
Large one-off items impacting financial results
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.