Amazon (AMZN) Is Pricey, But The Stock Deserves Its Premium

Amazon (NASDAQ:AMZN) shares gained more than 1% on Monday morning after new reports suggested that management is working on a checking account product. The company’s interest in adding financial services could add another sector to the list of those disrupted by Amazon, underscoring the e-commerce behemoth’s remarkable influence.

It did not take long for the online bookseller to evolve into a dominant retail force, and over the past several years, we have seen Amazon parlay its digital dominance into brick-and-mortar offerings and widespread innovation. AMZN is not only an e-commerce stock, but also a legitimate play in budding markets like video streaming, artificial intelligence, consumer staples, and cloud computing.

Amazon is now a company that has significant influence over the everyday behavior of its core customer base. Investors have certainly noticed this expansion, and shares have skyrocketed more than 80% over the past year alone.

But at least some of Amazon’s latest surge is owed to speculation over the company’s future. Sure, the Seattle-based firm is investing in innovation right now, but that is coming at the expense of some profits.

Amazon is currently sporting a Zacks Rank #3 (Hold). However, investors should really focus on the stock’s Style Score grades. Right now, AMZN is holding an “A” grade in the Growth category—but an “F” grade for Value.

Traditional value investors are likely to conclude that Amazon is too pricey right now. The stock is trading with a staggering Forward P/E of 176.7, and its PEG of 6.6 implies that its bottom-line growth is coming at a significant cost too.

One might mention that Amazon is best not to be compared to the broader market, but even when compared to its peer group, the stock looks at least a bit overvalued. Here’s a peek at AMZN’s recent P/S trend versus that of its peers:

Our system puts seven other stocks in Amazon’s peer group, including global internet commerce powerhouses like JD.com (NASDAQ:JD) , Alibaba (NYSE:BABA) , and Ebay (NASDAQ:EBAY) . The P/S ratio is a useful tool for valuing these companies, especially considering the high cost of international growth and the razor-thin margins we often see in e-commerce.

Many investors would look at these key metrics and conclude that AMZN is overpriced at its current levels. However, a compelling case could be made that investors simply have to pay a premium for companies that present such a rare combination of industry dominance and future potential.

The key to Amazon’s success over the next few years will be its ability to cash in on the user infrastructure it has built. The company has worked hard to create Amazon-for-life customers that use its services every day, across many segments of their lives.

For example, its acquisition of Whole Foods gave the company a grocery business that helps provide the fresher foods some might not look to buy online. Meanwhile, Amazon’s Echo speakers and Alexa assistant push customers back to its online platforms and secure closer interaction between its users and services. Amazon also has a powerful media division that is pumping out popular, critically-acclaimed content.

As we head into a new generation of technology that will see further autonomy and artificial intelligence, the familiarity and understanding that Amazon is building right now may prove to be incredibly valuable.

These investments have stretched Amazon’s current valuation, but they also present an investing opportunity like no other. AMZN is trading at a premium for understandable reasons.

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