Buy Amazon.com at $802 a Share? 3 Things You Need to Know

By Markets Fool.com

Seven is Amazon.com's (NASDAQ: AMZN) lucky number.

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This morning, for the seventh time this year (according to StreetInsider.com), Amazon stock received a new buy rating on Wall Street. That sounds like good news for owners of Amazon stock -- and it is. The stock has gained 1.6% in response to the new upgrade already. But here's some even better news for folks who own the stock:The analyst upgrading Amazon this morning is Argus Research.

According to our records on Motley Fool CAPS, Argus Research is one of the best stock pickers on Wall Street. Since 2008, when we first began tracking the analyst's performance, Argus' stock picks have outperformed the S&P 500 by better than 17 percentage points per pick, an outstanding record that places the analyst in the top 10% of investors we track.

And now it likes Amazon. Here are three things you need to know about that.


Amazon's Fire is on sale, and Argus says so is Amazon stock -- on sale, and also on fire! Image source: Amazon.com.

1. Why Argus likes it

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As explained in a write-up on TheFly.com this morning, Argus likes Amazon for three main reasons: First, it owns "well more than half" of the infrastructure-as-a-service (IaaS) market via its Amazon Web Services (AWS) business. Second, Amazon's online retail business is growing faster than its stock price. And third, Argus believes Amazon.com is a long-term buy -- so long as the first two trends remain true.

Argus rates the stock a buy and predicts Amazon.com stock will hit $935 a share within the next year.

2. Amazon is one expensive stock

All that being said, Argus does admit that Amazon stock sells for "rich multiples." Up 47% in value over the past 52 weeks, Amazon stock has never -- ever -- cost more than it does today. One single share of Amazon.com stock currently costs more than $802. By contrast, the second-biggest online retailer of general goods, Wal-Mart (NYSE: WMT), carries a per-share price in only the double-digits (about $72), and the third-biggest, Staples (NASDAQ: SPLS) is priced only in the single digits -- $8 and change.

3. Amazon is expensive...but not really

Is that too much to pay? Triple-digit valuations on the No. 1 retailer, when the No. 2 sells for double digits and the No. 3 player, just single digits?

Before you answer, remember that Amazon, Wal-Mart, and Staples are more than just stocks. They're also businesses. No matter how much a share of any of these companies' stocks costs, to know how expensive the business is, you need to add up all the shares that it has been carved into, multiply them by the stock price, and whatever you get -- the stock's market capitalization -- is how much the whole business costs.

Do that, and what you'll find is that Staples has a market capitalization of $5.5 billion, Wal-Mart Stores $223.4 billion, and Amazon.com $381.5 billion.

The most important thing: Valuation

Viewed from this perspective, you can see that Amazon.com, as a business, does indeed cost more than Wal-Mart -- but only 71% more, not 1,110% more. (It's still a heckuvalot more expensive than Staples, though?)

Now the question becomes: Is Amazon worth it?

Let's consider. Focusing on the Wal-Mart/Amazon race, Wal-Mart stock currently sells for 10.5 times trailing free cash flow, while Amazon stock has a price-to-FCF ratio of 51.6. On the other hand, analysts polled by S&P Global Market Intelligence see Wal-Mart growing its profits at only about 5% annually over the next five years, versus Amazon growing at 55% annually -- 11 times as fast as Wal-Mart. As a function of price-to-FCF-to-growth, therefore, Wal-Mart has a ratio of 2.0, while Amazon has a ratio of 0.9. (In fact, when you dig into the numbers, these analysts see Amazon's free cash flow roughly doubling in size between 2015 and 2017, between 2016 and 2108, and only then beginning to slow down -- doubling again between 2017 and 2020.)

What that tells me is that not only is Amazon.com stock relatively cheaper than Wal-Mart, it also suggests that Amazon.com stock is cheap, period -- even at $802 a share, even at $381.5 billion in market cap, and even at a P/E ratio of 200.

Long story short? Argus is right about Amazon selling for slightly terrifying "rich multiples." It's also right that the company is growing more than fast enough to justify those multiples.

And Argus is right when it says Amazon.com stock is a buy.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 280 out of more than 75,000 rated members.

The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.