Will Amazon's Status Be Buy, Sell, or Hold by 2025?
E-commerce giant Amazon (AMZN dropping 0.60%) consistently lands in my list of stocks worth investing in, regardless of the time. However, even legendary investors like Warren Buffett emphasize that top-notch companies should only be purchased at reasonable prices.
As 2024 nears its end, Amazon's shares have rocketed up by more than 46%. Currently, the stock sits just 6% below its all-time peak, which it reached two weeks ago. Is it still wise to buy Amazon at these skyrocketing share prices, or should you wait for the stock to cool down before reevaluating in 2025?
Is Amazon's stock overvalued?
Has this familiar tune about Amazon's price tag played before? The online retailer and cloud computing innovator has indeed ascended to a prominent position in the financial realm. It's one of the "Magnificent Seven" stocks, boasting a market cap of $2.27 trillion. Shares are trading at 47 times earnings (P/E) and 53 times free cash flow (P/FCF). It's hard to argue that Amazon's stock is a bargain right now.
This stock seldom appears to be a bargain
Yet, this stock rarely gives off the impression of a steal. Regardless of the metrics you use, Amazon shares often appear pricey.
The hefty P/E ratio is the lowest it's been in the last 15 years:
The cash flow ratio is also low in a historical context. In this view, Amazon stock seemed affordable after the 2008-2009 subprime meltdown and during the mid-2010s cloud computing boom. However, during 2013 and 2021, Amazon depleted its cash profits. Costly data center equipment, elite shipping services, and upgraded headquarters are expensive ventures.
In the end, Amazon's average P/FCF over the past 15 years stands at 108:
And it's worth mentioning that the stock still delivered impressive returns despite the high price tag. The S&P 500 increased by 424% during that 15-year period, but Amazon surged ahead with an astonishing 3,070% gain:
Timing perfection is elusive
I won't deny the role of spotting the perfect time to buy a specific stock can affect your returns. If you had invested in Amazon shares at the right moment in June 2009 instead of six months later, you'd have enjoyed a 5,550% profit instead. That's a substantial difference.
However, nobody has the power to pinpoint those ideal buy-in dates. Warren Buffett himself acknowledges that he can't predict "what the stock market will do in the next six months, or the next year, or the next two."
This uncertainty applies to the market as a whole and to each individual stock. The most intelligent investors can do is purchase shares in outstanding companies when it makes sense and then allow the underlying business to deliver sustainable growth and returns to shareholders in the long term. Billionaires like Buffett and I agree that this strategy is effective enough for us. It's a plan you should consider, too.
Yes, you can purchase Amazon right now
Maybe this isn't the absolute best moment to buy Amazon stock. But it's hard to argue that it's a negative time either.
Looking forward, Amazon should experience benefits from a stronger economy, the ongoing AI boom, and its recently introduced drone delivery system. We're dealing with a cutting-edge innovator with a versatile business model, and while outside appears expensive, it continues to deliver substantial returns over the years.
So it would be unwise to invest every penny available in Amazon stock today. However, you might consider starting a modest Amazon position if you haven't already, with techniques like buying in thirds or setting up a dollar-cost averaging plan.
The path ahead may be rocky, but you don't want to miss out on Amazon's shareholders enjoying market-beating returns in the long run while you watch from the sideline.
In light of Amazon's impressive 46% share price increase since the beginning of 2024, some investors might question whether now is the right time to invest in the company, given its high P/E and P/FCF ratios. Despite its high price tag, Amazon has delivered exceptional returns over the past 15 years, surging ahead with a 3,070% gain while the S&P 500 increased by 424%.
Given the uncertainty surrounding the market and individual stock performances, it's essential to approach investing with a long-term strategy. Warren Buffett, a legendary investor, emphasizes that the most intelligent investors can do is purchase shares in outstanding companies like Amazon when it makes sense and allow the underlying business to deliver sustainable growth and returns to shareholders in the long term. Whether this is the ideal moment to buy Amazon stock or not, starting a modest position could potentially lead to market-beating returns in the future.
