Is Amazon.com, Inc. (NASDAQ:AMZN) trading at a 26% discount?

key insights

• Using a two-step free cash flow to the stock, Amazon.com’s fair value estimate is $241.

• Amazon.com’s stock price of $178 indicates the company may be undervalued by 26%

• Our fair value estimate is 18% above Amazon.com’s analyst price target of $204.

How far is Amazon.com, Inc. (NASDAQ:AMZN) from its intrinsic value? Using the most recent financial data, we discount a company’s forecast of future cash flows to its current value, and find that the stock’s price is Make sure it’s a fair price. The discounted cash flow (DCF) model is the tool we apply to do this. It may seem very complicated, but it’s actually not that much.

Keep in mind that there are many different ways to value a company, and as with DCFs, each method has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flows, you can read more about the rationale behind this calculation in the Simply Wall St analytical model.

Check out our latest analysis for Amazon.com.

What is the estimated valuation?

We use a so-called two-stage model. This means that there are two different periods in the growth rate of the company’s cash flow. Generally, the first stage is a higher growth stage and the second stage is a lower growth stage. First, you need to estimate your cash flows for the next 10 years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will see their rate of contraction slow, and companies with growing free cash flow will see their growth rate slow over this period. This reflects the fact that growth tends to be slower in the early years than in later years.

We generally assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars.

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Estimated 10-year free cash flow (FCF)

(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) = USD 786 billion

The second stage is also called the terminal value, which is the cash flow of the business after the first stage. For various reasons, a very conservative growth rate is used that cannot exceed the country’s GDP growth rate. In this case, we used the five-year average of the 10-year Treasury yield (2.3%) to estimate future growth. As with the 10-year “growth” period, we use a cost of capital of 7.1% to discount future cash flows to their present value.

Terminal value (TV)=FCF₂₀₃₃ × (1 + g) ÷ (r – g) = USD 158 billion × (1 + 2.3%) ÷ (7.1% – 2.3%) = USD 3.4 trillion

Present Value of Terminal Value (PVTV)= TV / (1 + r)^Ten= 3.4 tons USD ÷ ( 1 + 7.1%)^Ten= 1.7 ton USD

The total value is the sum of the next 10 years’ cash flows plus the discounted terminal value, resulting in a total capital value calculation. In this case, it would be USD 2.5 trillion. The final step is to divide the stock value by the number of shares outstanding. Compared to the current share price of $178, the company appears to be slightly undervalued at a 26% discount to the current share price. The assumptions in the calculations have a significant impact on the valuation, so it’s best to view this as a rough estimate rather than an exact estimate down to the last cent.

Prerequisites

It is important to point out that the most important input to discounted cash flows is the discount rate, which is, of course, the actual cash flows. You are not required to agree to these inputs. I encourage you to redo the calculations yourself and give it a try. Additionally, DCF does not give a complete picture of a company’s potential performance because it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are considering Amazon.com as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital with debt taken into account (or weighted average cost of capital, WACC). For this calculation, we used 7.1% based on a leverage beta of 1.035. Beta is a measure of a stock’s volatility compared to the market as a whole. Beta values ​​are derived from industry average beta values ​​for globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.

SWOT analysis of Amazon.com

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Although important, the DCF calculation should not be the only focus when researching a company. It is not possible to obtain a reliable valuation with the DCF model. Rather, it should be viewed as a guide to “What assumptions need to hold true for this stock to be undervalued/overvalued?” For example, changes in a company’s cost of equity or risk-free rate can have a significant impact on valuations. Can we figure out why the company is trading at a discount to its intrinsic value? In the case of Amazon.com, there are three aspects that need further investigation.

1. financial health: Does AMZN have a healthy balance sheet? Check out our free balance sheet analysis, including 6 quick checks on key factors like leverage and risk.

2. future earnings: How does AMZN’s growth rate compare to its peers and the broader market? Dive deeper into analyst consensus numbers for the coming years by interacting with the free Analyst Growth Expectations chart.

3. Other strong businesses: Low debt, high return on equity, and good past performance are the fundamentals of a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you haven’t considered before?

PS. The Simply Wall St app performs daily discounted cash flow valuations for all stocks on the NASDAQGS. If you want to know the calculations for other stocks, please search here.

Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.