Amazon Inc. (AMZN) is not simply a stock trading in the US market, but is pretty much an enigma, consistently drawing attention and analysis from investors.
Widely misconstrued, the e-commerce giant has weathered critiques suggesting its retail approach is fundamentally flawed, putting a number of questions around investing in Amazon.
Critics argue for price hikes to boost short-term margins, a sentiment the founder, Jeff Bezos, tactfully rebuffs. Bezos champions a unique philosophy – the antithesis of conventional wisdom.
By maintaining exceptionally low prices, Amazon fosters customer trust, a linchpin for long-term success, and, interestingly, enhanced free cash flow.
This article delves into the intriguing philosophy that guides Amazon’s strategic decisions, steering away from mainstream investor preferences. Many are interested in investing in Amazon, due to its focus on long-term growth.
As a result, the company has sown various business seeds, some flourishing while others faced setbacks yet has always pushed on, despite everything. We explore the company’s commitment to constant reinvestment and consumer satisfaction.
Join us as we unravel the layers of Amazon’s business lines, deciphering their potential trajectory and the underlying principles driving this retail giant’s future prospects.
Performance and Metrics
Amazon.com has demonstrated stellar performance, outpacing the S&P 500 this year with three robust quarters and adept execution.
Evaluating the company’s strengths and weaknesses is crucial and the positives seem to substantially outweigh the negatives, given the remarkable growth prospects and the exceptional quality of Amazon’s business.
Examining Amazon’s metrics and balance sheet unveils a robust financial position, which is a major plus point for those keen on investing in Amazon. With $49.6 billion in cash and $14.5 billion in short-term investments, Amazon holds a strong liquidity position.
Remarkably, their combined cash and short-term investments nearly cover their long-term debt of $68 billion, affirming financial stability.
The trailing twelve months net income of approximately $20 billion further supports this, with debt being less than 4 times the net income, indicating a secure leverage situation that should not raise concerns among investors.
However, challenges emerge in the form of Stock-Based Compensation. Although Amazon’s TTM Adjusted Free Cash Flow (FCF) stands at $21.4 billion, it is offset by a substantial $23,310 million in TTM SBC paid to employees.
The SBC-adjusted FCF turns negative at $-1.910 million. Notably, the escalating SBC costs, rising from $12,757 million in December 2021 to $19,621 million in December 2022, are a notable concern.
While SBC has become a prevailing trend in today’s business landscape, prudent investors should consistently adjust FCF to SBC for a more accurate assessment, considering its impact on Amazon’s financial health.
Relative Valuation
When evaluating Amazon’s valuation in comparison to its formidable peers, commonly known as the magnificent seven—Alphabet (GOOG), Meta Platforms (META), Apple (AAPL), NVIDIA Corp. (NVDA), Microsoft (MSFT), and Tesla (TSLA)—a nuanced analysis is imperative.
Despite seemingly high EV/EBIT multiples, the true value emerges when considering business quality, entry barriers, and future growth prospects. This is crucial to consider when investing in Amazon.
Amazon’s pivotal role in generative AI, especially with AWS and the forthcoming Amazon Bedrock, presents substantial potential. Bedrock facilitates access to advanced LLMs, while AWS dominates cloud services.
Augmenting this, Amazon’s advertising arm, growing at 25% annually, leverages vast customer data for precise targeting, integrating ads seamlessly into various platforms.
Considering Amazon’s extensive growth opportunities, its valuation appears more reasonable, although not inherently cheap. Notably, competitors share similar growth potential, potentially offering more attractive valuations in totality.
Delving into Amazon’s Reverse Discounted Cash Flow (DCF) analysis, with a conservative TTM diluted EPS of $1.92, a 15% annual return implies a priced-in 22% annual EPS growth.
Historical EPS growth rates suggest a nuanced outlook: overvalued on a 5-year basis but markedly undervalued if achieving the 10-year growth rate.
Normalizing EPS to around $3.00 aligns with a 16% annualized growth, indicating fair to potentially undervalued status, especially considering recent strategic investments.
This multifaceted evaluation positions Amazon’s stock as a compelling prospect for investors navigating the dynamic landscape.
Financial Prowess
Amazon’s recent financial evolution showcases a noteworthy shift in fiscal strategy.
Following an ambitious post-Covid expansion spree, marked by pronounced capital expenditures surpassing operating cash flow, the company exhibited a negative free cash flow of $23.5 billion in Q2 2022 for the trailing twelve-month period.
However, the tide has turned, as the latest data indicates a positive free cash flow exceeding $21 billion in the past four reported quarters.
Contributing to this positive trajectory is the impact of rising interest rates, manifesting in a $400 million decline in net interest expense over the last five quarters.
Notably, there’s anticipation that Amazon might even report net interest income in 2024, a substantial improvement from the $1.5 billion annual expense it incurred just a few quarters ago.
Beyond Amazon’s internal financial dynamics, external factors, such as fluctuating energy prices, merit attention. Gas prices, a crucial economic metric, have notably receded since Amazon’s Q3 results in late October, promising potential cost savings for the company.
Moreover, the ripple effect of declining gas prices extends to consumer sentiment and spending patterns, with recent reports indicating a positive shift in inflation expectations.
As gas prices decrease, consumers may find themselves more disposed to allocate funds to discretionary purchases, marking a pivotal consideration for investors navigating investing in Amazon.
