Pioneer in the field of e-commerce Amazon (NASDAQ: AMZN) is among the small handful of stocks I would consider buying at any time. At the same time, master investors like Warren Buffett insists that even large companies should only be purchased at reasonable prices.
As 2024 comes to a close, Amazon shares are up more than 46% this year. The stock is trading just 6% below its all-time high reached two weeks ago. Is Amazon still a buy with these rising stock prices, or should you let the stock cool before revisiting it in 2025?
Stop me if you’ve heard this before: Amazon stock looks expensive.
The online retailer and cloud computing innovator has indeed reached a high position on Wall Street. It is one of the vaunted ‘Magnificent Seven’ stocks, with a market capitalization of $2.27 trillion. Shares change hands at 47 times earnings (P/E) and 53 times free cash flow (P/FCF). There’s just no other way to look at it: Amazon stock isn’t cheap right now.
On the other hand, this stock never seems like a bargain. It doesn’t really matter which metrics you apply to the graph; Amazon stock usually feels expensive.
The solid price-earnings ratio is approximately the lowest in the past fifteen years:
AMZN PE ratio data Ygraphs
The cash flow ratio is also historically low. In this view, Amazon stock felt affordable after the 2008-2009 subprime meltdown and again when its cloud computing segment became profitable in the mid-2010s, but Amazon also depleted its cash profits in 2013 and 2021. world-class shipping servicesand an upgraded headquarters can be expensive.
Ultimately, Amazon’s average P/FCF over the past fifteen years is 108:
AMZN price to free cash flow data Ygraphs
And I really don’t need to remind you that the stocks delivered exceptional returns anyway, right? The S&P500 (SNPINDEX: ^GSPC) rose 424% in the 15-year period I highlighted, but Amazon pulled ahead with a gain of 3,070%:
AMZN data Ygraphs
I agree that it makes a difference when you know how to find the perfect time to buy a particular stock. If you grabbed Amazon stock on the right day in June 2009 instead of six months later, you’d be pocketing a 5,550% return instead. That is a much better result.
But no one knows how to determine those perfect buy-in dates. Warren Buffett is the first to admit that he can’t see “what the stock market is going to do in the next six months, or the next year, or the next two.”
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This uncertainty applies to the market as a whole and to each individual share. The best thing an investor can do is pick up shares of big companies when it makes sense to do so, and then let the underlying businesses deliver profitable growth and shareholder returns over the long term. That’s good enough for billionaires like Buffett, and more than fine for me. You should also consider a similar approach.
Maybe this isn’t the best time ever to buy Amazon stock. But it isn’t either bad time.
Looking ahead, Amazon should benefit from a stronger economy, the continued growth of artificial intelligence (AI) and its recently launched drone delivery system. I’m talking about a world-class innovator with a flexible business plan, and the stock may never seem affordable but still offers winning returns over the years.
So you shouldn’t back up today, bet on the farm, or invest your nest egg in Amazon stock. If you haven’t already done so, you may want to take a modest position in Amazon, using price capping techniques such as sourcing from third parties or running an automated dollar cost averaging plan.
The road ahead may be bumpy, but you don’t want to watch from the sidelines as Amazon continues to treat its shareholders to market-beating returns over the long term.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has one disclosure policy.
Is Amazon a buy, sell or hold in 2025? was originally published by The Motley Fool