Is Amazon a ‘Buy’ After Its Recent Price Correction?

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In this post I will analyze Amazon.com Inc. (NASDAQ:AMZN) from a fundamental perspective and estimate how close the stock price is to fair value after its steep correction, which was triggered by slightly disappointing sales growth (see story on Bloomberg).

All the tools I used to write this article are featured in my recently published book, Applied Equity Analysis and Portfolio Management, which also contains a more detailed case study on Amazon’s valuation and an interactive spreadsheet that allows users to study and model the company’s metrics in even greater depth. As you read the following analysis, bear in mind that the process featured in the book focuses on whether a stock is suitable for a fundamentals-based buy-and-hold portfolio.

Amazon makes an interesting valuation case study because it continues to perplex professional analysts, as it has done for years. In a report dated January 31, Michael Souers of S&P’s Capital IQ downgraded Amazon all the way to “sell,” with a 12-month target price of $350, while a team of four analysts at Credit Suisse left Amazon at an “outperform” rating in a report with the same date, estimating the fair value of the stock to be closer to $450. Even after its recent revenue miss and price decline, it is clear that analysts’ opinions remain divided.

For both the past year and last three trading months (shown below), Amazon’s stock delivered returns similar to another NASDAQ favorite, Google (NASDAQ:GOOG), but Amazon’s January 30-31 price decline stands out:

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