Should I buy Amazon shares today?

Amazon (NASDAQ: AMZN) shares have underperformed this year. While major stock market indexes such as the S&P 500 and the FTSE 100 have climbed higher, Amazon’s share price has actually fallen. Is now a good time to buy Amazon shares? Here’s my take. Why Amazon’s share price has stalled Amazon’s […]

Amazon (NASDAQ: AMZN) shares have underperformed this year. While major stock market indexes such as the S&P 500 and the FTSE 100 have climbed higher, Amazon’s share price has actually fallen.

Is now a good time to buy Amazon shares? Here’s my take.

Why Amazon’s share price has stalled

Amazon’s share price weakness this year is not so surprising. For starters, the stock delivered huge gains last year, rising from $1,848 to $3,257. After that kind of performance, a pullback, or period of consolidation, was always a possibility.

Secondly, with Covid-19 vaccines being rolled out, all the attention is on reopening stocks such as airlines right now. Big Tech stocks that did well during the pandemic generally aren’t so popular.

Buying opportunity

I’m looking at the current share price weakness as a buying opportunity. Amazon’s recent first-quarter 2021 results were very strong and smashed Wall Street’s expectations. For the quarter, e-commerce growth was 44%. Meanwhile, growth in the cloud computing division was 32%. Earnings per share came in at $15.79, versus $5.01 in Q1 2020.

Looking ahead, I expect Amazon to deliver powerful growth in the long run. Its two key markets, e-commerce and cloud computing, are projected to grow substantially over the next decade. This growth should provide tailwinds. In five years’ time, I think Amazon is likely to be much bigger than it is today.

Amazon stock forecast

It’s worth noting that after the company’s Q1 results, over 20 analysts increased their share price targets for the stock. Pretty much every one of them lifted their target to $4,000, or higher. One analyst even went to $5,500.

Currently, the average stock price forecast for Amazon is $4,245. That’s about 33% above the current share price. This reinforces my view that now’s a good time to buy the stock.

Valuation

Turning to the valuation, Amazon stock isn’t cheap by traditional valuation measures. Currently, it sports a forward-looking price-to-earnings (P/E) ratio of about 58. That’s almost three times the median S&P 500 forward-looking P/E ratio.

However, history shows that not buying Amazon stock because of its high valuation has been a mistake. Over the last 10 years, Amazon has always traded on a high P/E ratio. At times, its P/E has been above 200. And its 10-year return? Over 1,600%.

Risks

There are risks to be aware of, of course. One is that Amazon’s a volatile stock. On a regular basis, its share price pulls back 20%, or more. So, this isn’t a stock for those who need capital preservation.

Amazon also faces intense competition. In e-commerce, it faces competition from the likes of eBay, Shopify, and ASOS. In cloud computing, it faces rivals Microsoft, and Alphabet.

Amazon shares: I’d buy today

Overall however, I believe Amazon stock offers an attractive risk/reward proposition right now. With the stock consolidating its gains from early 2020, I think it’s a great time to be buying. I hope to see $4,000 in the not-too-distant future.

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Edward Sheldon owns shares in Amazon, Microsoft, Alphabet, ASOS, and Shopify. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Microsoft, and Shopify. The Motley Fool UK has recommended ASOS and eBay and recommends the following options: short January 2023 $1160 calls on Shopify, long January 2023 $1140 calls on Shopify, short June 2021 $65 calls on eBay, long January 2022 $1920 calls on Amazon, and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The post Should I buy Amazon shares today? appeared first on The Motley Fool UK.

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