When we invest, we’re generally looking for stocks that outperform the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Amazon.com, Inc. (NASDAQ:AMZN) share price is up 63% in the last 5 years, clearly besting the market return of around 46% (ignoring dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 30% in the last year.
After a strong gain in the past week, it’s worth seeing if longer term returns have been driven by improving fundamentals.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During five years of share price growth, Amazon.com achieved compound earnings per share (EPS) growth of 16% per year. This EPS growth is higher than the 10% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company. Having said that, the market is still optimistic, given the P/E ratio of 68.30.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It’s probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. It might be well worthwhile taking a look at our free report on Amazon.com’s earnings, revenue and cash flow.
A Different Perspective
We’re pleased to report that Amazon.com shareholders have received a total shareholder return of 30% over one year. That’s better than the annualised return of 10% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. Before spending more time on Amazon.com it might be wise to click here to see if insiders have been buying or selling shares.
But note: Amazon.com may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.
Valuation is complex, but we’re helping make it simple.
Find out whether Amazon.com is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.