Essay Example on Amazon Stock: Rapid Increase Amidst Covid-19

According to marketwatch.com, the value of Amazon's stock was trading at $2367.61 at the closing of 7th May 2020. The share has been increasing in recent days rapidly. This has been due to increased use of the e-commerce platform due to the covid19 measures that are being observed by society to minimize the rate of spread of the disease. This has increased the sales in amazon, making the stock a lucrative investment. Nonetheless, there is a need for a proper market analysis to avoid future surprises and losses (da Silva et al., 2019).

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The price-earnings ratio would be ideal since it relates to the company's share of its earning per share (Lukinskiy, 2017). It is appropriate to estimate the expected growth rates in the future of the company.

price per earning ratio=net income annuallyshareholder's equity

From the Amazon perspective, the price per earnings ratio is at 110. This implies that an investor needs to invest at least $110 in Amazon Company to yield a dollar from the company's profits. This is a costly type of stock in a market, given that the average value of the e-commerce market is 38.

According to Lukinskiy (2017), the price to book ratio compares the company market capitalization to its book value. Typically, the market value of equity is always larger than the book value of the company. The ratio assumes that the market is inefficient, and at any given time, some firms are trading significantly less than their actual worth. Hence, when the value of the price to book ratio is below 1 in the market, it acts as a signal of a company that has its stock undervalued. Undervalued stocks have high chances of growth in the market, and hence they present an appropriate investment. The ratio is evaluated by

price to book ratio=stock pricetotal assets-liabilities The amazon's company price to book ratio is at 14.30 as at 7th May 2020. The value of amazon price to book ratio is way above one and would not present a suitable stock to invest in since the possibility of the stock of increase in the future seem to be minimal.

The price to earnings growth ratio is the earnings growth rate over some time. It is essential to evaluate the projected rate of growth in a specific period when purchasing stocks (Lukinskiy, 2017). Similarly, a lower PEG value is an indication of an undervalued stock in the market, and thus the stock presents valuable assets to invest. It is calculated

PEG=SHARE PRICEEARNING PER SHAREEARNING PER SHARE GROWTH RATEThe price per earnings growth ratio of the Amazon Company is 4.96. This implies that the stock of the Amazon Company is highly overvalued in the market.

Return on equity is the percentage value of the company's annual return, divided by the value of the total shareholder equity (MUSALLAM, 2018). The value of the ROE represents the total return on equity capital and shows the firm's ability to turn equity investments into profits. The ROE measures how efficient a company can use the money to generate profits and grow the company. It is calculated by

ROE=net income annuallyshareholder's equityThe quarterly ROE of Amazon Company was at 17.31% at the end of March 2020(marketwatch.com, nd). Hence this shows that amazon is generating $17.1 for every share invested in the company. Thus, this is the right amount of money for a company to be creating a single share within a period of just 3months. This is making it a lucrative stock worth investing.

The debt to equity ratio is an important metric that is used to measure the degree to which a company is financing its operation through debts versus wholly-owned funds (MUSALLAM, 2018). It is calculated by dividing the company's total liabilities by shareholder equity.

debt to equity ratio=total liabilitiestotal share holder equityThe higher value of the ratio is an indication that the stock of the company poses a significant risk to their shareholder. For the amazon company, the debt to equity ratio was found to be 0.36 at the end of March 2020. This is an indication that the debts that amazon company has are significantly smaller than the total Shareholders' equity making it such a lucrative investment on the stock of the company. It is because the company will have the ability to pay all its debt in case of the business downturn

According to Baker el at (2020), stocks tend to be overvalued when the intrinsic value of the stock is smaller than the market value. According to marketwatch.com, the intrinsic value of amazon's stock value was at $950 at the end of March 2020. However, at the amazon market, the price was ranging at $1949.72 at the time. It is a clear indication of the stock value being extremely overvalued in the market at the time. Hence, the value of amazon's shares is expected to fall shortly drastically.

Conclusion

In conclusion, when taking all account of the company's ability to pay its debt, ability to generate enough profit for a shareholder investment, and the growth rate of the company, it is clear that the Amazon stock value is expensive and highly overvalued in the market. Hence, the market may be in for a massive fall in price once the cure for covid19 has been found. Thus not a good investment in the long run.

References

Amazon.com Inc. (n.d.). Retrieved from https://www.marketwatch.com/investing/stock/amzn

Baker, H. K.,el at., (2020). Common Stock Pitfalls that Can Lead to Big Losses. In The Savvy Investor's Guide to Avoiding Pitfalls, Frauds, and Scams. Emerald Publishing Limited.

da Silva, A. P.,el at., (2019, December). Performance Evaluation of Recurrent Neural Networks for Short-Term Investment Decision in Stock Market. In International Conference on Advanced Communication and Networking (pp. 247-261). Springer, Singapore.

Lukinskiy, V., (2017). Evaluation of stock management strategies reliability at dependent demand. Transport and Telecommunication Journal, 18(1), 60-69.

MUSALLAM, S. R. (2018). Exploring the relationship between financial ratios and market stock returns. Eurasian Journal of Business and Economics, 11(21), 101-116 .