Is Amazon Stock Overvalued or Dirt Cheap? Here's the 1 Metric That Matters

In the past two decades, Amazon (NASDAQ: AMZN) shares have surged over 11,300% higher (as of March 6). This makes it one of the best-performing stocks this century, without a doubt. The leading e-commerce and cloud computing enterprise currently sports a huge market cap of $2.3 trillion. This is even with shares falling nearly 16% from their peak.

For investors considering a purchase now, is this "Magnificent Seven" stock overvalued or dirt cheap? Here's the single metric that matters most when making that choice.

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This is a popular valuation methodology

In the investment world, the price-to-earnings (P/E) ratio is one of the leading ways to assess a stock's valuation. As the name suggests, it calculates a company's current stock price relative to per-share net income over the trailing 12 months. Obviously, if a business doesn't report positive profits, then this metric can't be used.

Amazon trades at a P/E multiple of 29.7 right now. This might be viewed as an expensive setup at first. That's because the S&P 500 index carries a P/E ratio of 24.8. So, Amazon trades at a premium to the overall market.

But investors have to dig beneath the surface. Looking at historical data is helpful. Amazon's P/E multiple has contracted by 94% over the past decade. And during that 10-year time period, the ratio averaged 114.3.

Amazon provides a favorable setup for investors

Amazon collected $717 billion in net sales in 2025. And as mentioned, its market cap is massive. Plus, the business has a strong position in the various markets that it serves. Therefore, this stock is rarely ever trading at a dirt-cheap valuation. Perhaps this was the case at the end of 2022, after the share price plummeted that year.

The stock also isn't overvalued, as indicated by the P/E ratio. I think investors can accurately assume that Amazon shares are still undervalued and cheap today. The shares lean more toward being a bargain opportunity than being overpriced. This should be an exciting development for prospective investors.

A deal too hard to pass up

This is one of the highest-quality companies out there. Amazon's robust competitive position is almost impossible to topple. It has an unrivaled scale that supports its online marketplace and logistics network, which offer consumers an exceptional value proposition with low prices and fast and free delivery.

Amazon Web Services puts this company at the forefront of artificial intelligence (AI). There is strong demand for AI tools, according to CEO Andy Jassy. This provides a growth and profit engine.

It's time to take advantage of the current valuation. Investors who decide to buy Amazon stock today with the intention of holding for five years are setting their portfolios up for success.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.