Amazon is one of the largest companies in the world, but its valuation leaves plenty of room for growth. The stock’s valuation multiples don’t do justice to the growth prospects of this e-commerce giant.
Amazon experiences 27% year-on-year sales growth and this growth profile is simply too good for a company trading at only 3,2-times revenue.
Relatively weak operating margins have long been a roadblock for Amazon. But massive growth in both sales and margins in Amazon Web Services (AWS), as well as the growing dominance of Amazon Prime in the US, mitigate such concerns and make a strong case for undervaluation in the equity.
Amazon’s international segment currently operates at negative operating margins. However, the trend looks set to reverse as Amazon Prime penetrate these markets.
Amazon’s primary top-line growth factors are international expansion and Amazon Web Services. AWS will improve overall margins, but international expansion is still in a negative margin situation. The trends have exacerbated in 2016.
In the full year 2016, North America represented almost 60 percent of total revenue while international and AWS represented roughly 30% and 10%, respectively. There is room for growth here, and it isn’t unreasonable to expect Amazon to be able to replicate North American success in other developed regions of the globe.