Amazon's Low P/E Ratio Hides Complicated Math
Amazon's stock has surged to an all-time high above $287 after its quarterly report, sparking a wave of bullish calls. The company's market capitalization is near $3 trillion and its trailing price-to-earnings ratio (P/E) is just 22, which seems like a bargain compared to the S&P 500's average of 24.
The main driver behind this enthusiasm is Amazon Web Services (AWS), whose revenue surged 37% in the quarter ended June 30. AWS generated $16.6 billion in operating income for Amazon, accounting for 61% of its total operating income of $27.5 billion.
However, a closer look at Amazon's bottom line reveals that the company's net income has been inflated by $53.4 billion in 'other income', mainly due to a revaluation of its investment in AI firm Anthropic. If this one-time gain is stripped away, the profit base shrinks substantially.
Still, Amazon's forward P/E ratio is around 23 based on analyst estimates for next year, which doesn't indicate absurd overvaluation. The company has tangible momentum with AWS having an order backlog nearing $500 billion and revenue growth in various segments accelerating.