Approach 2: Amazon.com Price vs Earnings

For a profitable company, the P/E ratio is a useful way to think about what you are paying for each dollar of current earnings. It links the share price directly to earnings, which is often the main driver of long term returns.

What counts as a “normal” P/E depends on how quickly earnings are expected to grow and how risky those earnings are. Higher expected growth or lower perceived risk can justify a higher P/E, while slower growth or higher uncertainty usually supports a lower one.

Amazon.com trades on a P/E of 29.16x. That compares with a Multiline Retail industry average P/E of 18.67x and a peer average of 23.12x. Simply Wall St also calculates a proprietary “Fair Ratio” of 44.87x for Amazon.com, which is the P/E that would be expected given factors such as its earnings growth profile, industry, profit margin, market cap and risk characteristics.

This Fair Ratio can be more informative than a simple comparison with peers or the industry, because it adjusts for the company’s specific growth outlook, risks and profitability. Since Amazon.com’s current P/E of 29.16x is below the Fair Ratio of 44.87x, the stock screens as undervalued on this metric.

Result: UNDERVALUED

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Earlier it was mentioned that there is an even better way to understand valuation, so here is Narratives, where you attach a clear story about Amazon.com to concrete numbers like your assumed fair value, future revenue, earnings and margins, then see how that story translates into a valuation that can be compared with the current price.

A Narrative on Simply Wall St combines your view of the business with a full forecast and fair value. It sits alongside other investors’ Narratives on the Community page, and updates automatically when new data such as earnings or news is added so your thesis is always using the latest inputs.

This means you can quickly see whether your fair value suggests the stock is above or below your range and decide if it looks more like a hold, a potential opportunity or something to watch, instead of relying only on headline P/E or a single DCF output.

For Amazon.com, one investor might build a Narrative around high margin engines like AWS, advertising and subscriptions and arrive at a fair value of about US$475.09 per share. Another investor might focus on more conservative assumptions around margins, growth and discount rate and land closer to US$168.12. This shows how different but clearly defined views of the same company lead to very different conclusions that you can compare directly with today’s US$246.10 share price.

For Amazon.com however we will make it really easy for you with previews of two leading Amazon.com Narratives:

🐂 Amazon.com Bull Case

Fair value in this Narrative: US$450.00

Implied discount vs last close: about 45.3% below this fair value

Revenue growth assumption: 8.95%

• The author sees Amazon.com as intentionally compressing margins to fund large AI, cloud and automation investments that are expected to reshape future earnings power.

• AWS, advertising and a more efficient retail business sit at the center of this view, with AI tools and custom chips framed as long term drivers of cloud and commerce demand.

• The valuation angle is that the market is focusing on near term margins while this Narrative focuses on what earnings could look like once the current investment cycle matures.

🐻 Amazon.com Bear Case

Fair value in this Narrative: US$234.75

Implied premium vs last close: about 4.8% above this fair value

Revenue growth assumption: 13.6%

• The author is positive on Amazon.com’s long term potential but anchors on a fair value that sits a little below the current price, even with solid revenue and earnings assumptions.

• This Narrative highlights strengths such as e commerce scale, AWS, advertising and AI related capex, while also calling out competition in cloud, supply constraints and tariff uncertainty.

• The conclusion is that the stock is attractive mostly at or below a specific entry range around the author’s valuation, based on projected returns over 2, 5 and 10 year horizons.

If you want to see how many other investors frame the same data in different ways, and where your own view fits, See what the community is saying about Amazon.com.

Do you think there’s more to the story for Amazon.com? Head over to our Community to see what others are saying!

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.

Companies discussed in this article include AMZN.

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