Amazon beats expectations but Bezos exits
Amazon (AMZN) has been one of the most talked about stocks on Wall Street in recent weeks, due in large part to the big news that broke back in early February centered around the company’s famed founder and CEO, Jeff Bezos, stepping down from his current leadership role.
Since that news broke roughly a month ago, Amazon shares have fallen nearly 6%. Furthermore, Amazon shares are down roughly 10% from the highs in the $3,552.25 that they made roughly 6 months ago. This share price weakness also plays into the interest in the company. For years, Amazon has been one of the fastest growers in the stock market and when change happens, investors wonder if a company is losing its luster.
Anytime there is a leadership change at a founder-led company, investors get nervous. Such changes have come with turmoil in the past. However, this isn’t always the case and when we aggregated the opinions provided in articles written by analysts with a 5-star rating at Nobias, we saw that the outlook on Amazon shares continues to be bullish.
In his recent article, “Why Is Everyone Talking About Amazon Stock”, John Ballard, of The Motley Fool, highlighted the fact that while Amazon’s share price may be suffering, its operations and the underlying fundamentals that they generate certainly aren’t. When discussing the company’s recent fourth quarter report in a recent article, he said, “The first thing that jumps out about Amazon is that, while it's a large business, it continues to grow like a small one. In 2020, sales accelerated to a 38% growth rate, up from a still-robust 20% growth rate in 2019. And there isn't any sign that this momentum is waning.”
He then went on to showcase some of Amazon’s most appealing operational systems, saying, “One of Amazon's biggest advantages over the competition is logistics. At the end of 2020, the company had a massive 390 million square feet of fulfillment facilities and data centers. That's more than double its square footage in 2017. Management reported during its fourth-quarter earnings call that its square footage grew about 50% during the last year.” He continued, highlighting the long-term profits generated by the company’s ongoing investment into logistics infrastructure, explaining that, “Once a new fulfillment center is built, there's limited extra expense to keep it running, which means more incremental sales can be converted into a profit. This explains why the acceleration in sales during the holiday quarter contributed to a whopping 77% increase in operating income.”
Ballard then notes that the majority of Amazon’s value comes not from the retail business that the company is most famous for (the “everything” store which is Amazon.com), but instead, the company’s Amazon Web Services (AWS) segment and the broader ecosystem of apps and services that the company has built into its Amazon Prime subscription. He says that in 2019, he saw an analyst estimate the “value of AWS alone at $500 billion”. Ballard points out that this report was published in 2019 and since then AWS has continued along its strong, double digit growth trajectory, meaning that today, the value attached to AWS is likely even higher. He also mentioned a report that he read in 2020 by Needham analyst, Laura Martin, which estimated “that Amazon's media assets -- including Prime Video, Prime Music, and Twitch, the popular video game streaming site -- were worth another $500 billion.”
Today, Amazon’s total market cap is $1.56 trillion, meaning that these non-eCommerce related assets potentially make up the majority of Amazon’s value. Jason Hall, also of The Motley Fool, agrees with Ballard’s high level premise. In a recent podcast episode centered around Amazon’s Q4 results and the news that Bezos was stepping down, Hall said, “I think I said that most people, even a lot of investors, view Amazon through the lens of Amazon.com, through that retail business. It drives most of the revenues and it's how most people know about the company. The lens that Amazon's management views the company is through AWS [Amazon Web Services].”
And, with this in mind, he was bullish on the hire of Andy Jassy as Jeff Bezos’ replacement as CEO of Amazon, due to Jassy’s former job at the company as CEO of Amazon Web Services. Regarding Jassy, Hall says, “He has an MBA. He came in as, I think, a marketing manager. This is not an engineer, this is not somebody that came through writing code. This is somebody that started out with a more business-centric view of Amazon.”
During that same Motley Fool podcast, 5-star Nobias analyst, Danny Via, built upon this viewpoint, saying: “Jassy has been the CEO of Amazon Web Services and he is now taking the helm at Amazon, I think what you're going to see is his focus has always been on AWS. I think he probably has some big ideas about ways that AWS could further be used to enrich Amazon.” Via continued, “He's got that mindset. Coming from AWS, he's going to bring that perspective to the larger picture of how Amazon is run and we saw that happen with Satya Nadella and with Microsoft and how much Microsoft has benefited from that forward-looking perspective on cloud computing.”
For reference, since Satya Nadella took over from Steve Ballmer as CEO of Microsoft in February of 2014, Microsoft’s share price has risen from roughly $38/share to $236.94/share, representing gains of nearly 525%.
Right now, the average price target on Amazon shares provided by analysts with 4 and 5 star ratings in the Nobias system is $4077.33, which represents near-term upside potential of 29.5%. This is a far cry from the massive gains that Microsoft produced in the years after Nadella took over; however, roughly 30% gains by a $1.5 trillion company would be an impressive feat, nonetheless.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
But, the bull thesis surrounding Amazon isn’t just a short-term bet. 5-star Nobias analyst, Divya Premkumar, of The InvestorPlace, notes that Amazon just “Reported its best earnings yet and provided guidance for greater growth in the next quarter. According to analysts, there will be a sequential increase in earnings with earnings per share (EPS) going as high as $121.65 by 2024.”
Looking at AMZN’s valuation multiple in the market today, we see that shares are trading with a blended price-to-earnings ratio of 73.5x. And, while a 73.5x multiple might seem expensive to investors, Ballard points out in another recent article of his, that this premium is not all that elevated, relative to Amazon’s competition in the growing eCommerce space.
For instance, he notes that “Compared to other top e-commerce stocks, such as Etsy and Shopify, the online retail giant offers relatively good value. Amazon is cheaper based on price-to-sales and price-to-earnings ratios, and is No. 2 among the three when valued on free cash flow.”
It’s also worth noting that Amazon’s current premium is far below the company’s 5 and 10-year average price-to-earnings ratios of 103.7x and 187x multiples. And, even if Amazon shares continue to trade with today’s relatively discounted premium over the next 3 years and the above EPS estimate that Premkumar highlights comes to fruition, we’ll be looking at a share price of $8941, which would imply a 29.8% CAGR over the coming 4 years.
This is the type of performance that is likely to make any portfolio management happy, which is why Ballard concluded his recent article titled, “Why Is Amazon’s Stock So Expensive” by saying, “With so much opportunity ahead in e-commerce globally, Amazon remains a top growth stock to consider.”
Disclosure: Nicholas Ward is long Amazon. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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