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What's Wrong With Amazon.com (AMZN) Stock, and Is It a Buy in November?

The Motley Fool · 1d ago

Key Points

  • Amazon is a giant, and it's still growing robustly.

  • Revenue recently grew 14% year over year, while its cloud computing revenue popped 39%.

  • The stock seems reasonably or attractively valued, too.

Shares of Amazon (NASDAQ: AMZN) have averaged annual gains of 4% over the past 15 years and 22% over the past decade. But over the past year, they're up only 9%. So what's wrong with Amazon? I would argue not much, but let's take a look.

First off, know that the long-term average annual gain for the stock market is close to 10%, and a 9% gain is quite respectable. Also, it can be hard for any company to sustain an average annual gain of more than 20% -- especially once it has become a huge company, and Amazon's recent market value is nearly $3 trillion.

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Amazon's logo is shown against a gold background.

Image source: The Motley Fool.

Furthermore, stocks of healthy and growing companies will tend to rise in value over time, but they won't do so in a straight line. The lines are always jagged, reflecting jumps and drops. Another factor is that when a company's stock rises too far, too fast, it becomes overvalued and more likely to pull back at least a bit, toward a more intrinsic value.

How is Amazon doing?

All those things are true, but sometimes the company in question is struggling. Amazon doesn't seem to be on very rocky ground. For example, its third quarter featured revenue up 12% year over year and its highest operating profit margin ever, 13.9%. And its cloud computing platform, Amazon Web Services (AWS), is dominant, with CEO Andy Jassy predicting it will be worth $1 trillion.

Still, there are some issues: The company's e-commerce growth is slowing a bit, and it's spending heavily on capital expenditures, such as its artificial intelligence (AI) build-out. Shrinking free cash flow, along with meaningful debt (recently $173 billion), is causing concern among some investors.

Still, I think Amazon is a buy this month for long-term investors -- because it's posting some heady numbers -- such as AWS revenue growing by 39% year over year -- and its valuation still seems reasonable. Its recent forward-looking price-to-earnings (P/E) ratio of 25, for example, is below its five-year average of 38.

Selena Maranjian has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.