Over the past six months, Amazon has been a great trade, beating the S&P 500 by 11.1%. Its stock price has climbed to $224.58, representing a healthy 16.4% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Following the strength, is AMZN a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.
Why Does Amazon Spark Debate?
Founded by Jeff Bezos after quitting his stock-picking job at D.E. Shaw, Amazon (NASDAQ:AMZN) is the world’s largest online retailer and provider of cloud computing services.
Two Positive Attributes:
1. Skyrocketing Revenue Shows Strong Momentum
Amazon shows that fast growth and massive scale can coexist despite the conventional wisdom about the law of large numbers. The company’s revenue base of $265.5 billion five years ago has more than doubled to $620.1 billion in the last year, translating into an incredible 18.5% annualized growth rate.
Amazon’s growth over the same period was also higher than its big tech peers, Alphabet (17%), Microsoft (14.4%), and Apple (8.5%). 
2. Outstanding Long-Term EPS Growth
We track the long-term change in earnings per share (EPS) because it shows whether a company’s growth is profitable. It also explains how taxes and interest expenses affect the bottom line.
Amazon’s EPS grew at an astounding 32.8% compounded annual growth rate over the last five years, higher than its 18.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.
One Reason to be Careful:
New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Amazon’s ROIC has decreased significantly over the last few years. This is because it’s investing aggressively to capture multiple opportunities in its core markets as well as new ones like healthcare. Given the long-term nature of ROICs, only time will tell if its recent bets bear fruit.
Final Judgment
Amazon’s merits more than compensate for its flaws, and with its shares outperforming the market lately, the stock trades at 41.2× forward price-to-earnings (or $224.58 per share). Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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