During a recent Earnings Recap session, we talked about Amazon (AMZN) and did a deep dive into its valuation. The results were shocking. When you look under the hood of the stock’s valuation, you see that the market’s expectations for future cash flows are shockingly high. Shocking. Let’s get specific.
Expectations Investing Analysis on AMZN
As we do for all of our Reverse DCF Case Studies, we use our valuation models to quantify the future performance of the company required to justify its current stock price.
Specifically, our model shows that to justify ~$239/share Amazon would have to:
- grow revenue at 10.9% compounded annually for 39 years while also
- improving its return on invested capital (ROIC) from 14% to 64%.
Let’s put some context around those expectations.
Benchmarking Expectations for AMZN
First, growing revenue at 10.9% CAGR for 39 years means Amazon’s revenue would be $32.2 trillion in 2063.
$32.2 trillion is 26% greater than the United States’ GDP in 2024. $32.2. trillion would also rank Amazon as the third largest GDP in the world in 2063. See Figure 1 for details.
Figure 1: Comparing Amazon’s Revenue to the GDP of the Largest Countries in the World
Sources: New Constructs, LLC and company filings. 2024 GDP stats from here.
*2063 GDP values assume a 4% nominal compounded annual growth rate.
It is important to note that the stock price embeds expectations for revenue reaching $32.2 trillion while Amazon – also – increases its ROIC from 14% to 64%.
As we discuss in our latest reverse DCF case study video, we think there are several reasons why the expectations embedded in Amazon’s current stock price are too high.
Competitive Realities
Large revenue growth, like what’s embedded in Amazon’s stock price, implies significant market share gains. We note that market share gains are typically won with lower prices, which are not possible with a company that must also increase its ROIC to very high levels. Specifically, a 14% ROIC ranks 135th in the S&P 500 while a 64% ROIC ranks 11th, behind firms like Apple (AAPL), Mastercard (MA) and Nvidia (NVDA).
In other words, Amazon’s stock price is implying a doubly-incredible future where the company enjoys huge revenue growth and ROIC improvement as well.
Currently, only one company, Apple, ranks in the top 10 of the S&P 500 for ROIC (7th) and revenue (3rd). Amazon’s trailing 12 months revenue ($620 billion) ranks #2 in the S&P 500, just behind Walmart (WMT) at $674 billion. For reference, Walmart’s ROIC is 11%.
So, hypothetically, Amazon would only need to dramatically improve its ROIC rank to join Apple as one of the few companies to rank so highly for ROIC and revenue at the same time.
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More Expectations Investing Case Studies
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If you enjoyed seeing what we show for Amazon’s real cash flows as well as the future revenue expectations baked into the stock price, you’ll love our other reverse DCF case studies.
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How To Avoid the Landmines
Whenever stocks get super expensive, it is only a matter of time before they fall back to earth as the law of competition inevitably proves the expectations for future cash flows to be overly optimistic.
We have multiple Model Portfolios, including our Zombie Stocks list, to warn investors of stocks to avoid and alert them to stocks that get our Attractive rating. We also provide best-in-class ratings for stocks, ETFs, and mutual funds.
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This article was originally published on February 14, 2025.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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