Question

Analyze the stock price of the Amazon common stock. What is the current stock price? Is it currently overpriced or underpriced according to the CAPM model and the dividend growth model?). Please give a recommendation about whether to invest in Amazon or not based on the results and current situation.

Answer 1

I personally feel that Amazon has been overpriced for a time and it is offering no value for investment.

I am a conservative investor who mostly look for securities which offer value to me as I look to capitalise upon the gap of value and price, but Amazon is richly valued and it has even discounted its forward earning in advance so I am not going to invest in such stock which is loaded onto such high expectation that any smaller disappointment could be fatal for many investors.

According to Capital asset pricing model, even if one assign 20% of growth year on year for this company, this is not the appropriate valuation as the valuation would approximately be close to $1500 and according to dividend discount model the value is much smaller.

So I am refraining from investment into such share, which has a global presence and Amid such concern of coronavirus, when the economies are shut, this will lead to degrowth in its future earnings and then it will start to reflect into its shares but I would rather be cautious and not invest for some short term upside in order to take long term pain.