AMZN with Nobias technology: Will This Year-to-Date Laggard Start Playing Catch Up?
When it comes to American technology stocks, Amazon (AMZN) is often the posterboy of success. The company comes with a fantastic story of a small start-up evolving from its humble roots selling books out of a garage to becoming the world’s preeminent digital retailer, a leader in the cloud computing space, and a fast growing powerhouse in the digital advertising space.
Amazon’s success over the years has turned its founder, Jeff Bezos, into the world’s richest man. The stock has minted many millionaires, due to the tremendous total returns that its stock has generated over the last several decades.
Amazon’s $1.6 trillion market cap makes it the world’s 4th largest company (behind Apple (AAPL), Microsoft (MSFT), and Saudi Aramco). And, even though the company is quite large, AMZN is still a very fast grower, having posted 82% y/y earnings-per-share growth in 2020. Yet, even with all of this success in mind, AMZN shares have been a notable laggard over the last year. During the trailing twelve months, Amazon shares are down 2.95%. Year-to-date, AMZN is down 1.75%. This relatively flat performance comes during a period of time where the S&P 500 has posted roughly 17.5% gains. With this relative underperformance in mind, we wanted to take a look at Amazon shares to see what the credible analysts that the Nobias algorithm tracks have had to say recently about this beleaguered blue chip.
Today, AMZN shares trade for $3,199.95; however, it wasn’t long ago that the stock was trading above $3,700. So, what happened? Well, the company’s Q2 earnings report disappointed investors, leading to a nearly 15% sell-off.
Jill Goldsmith, a Nobias 4-star rated analyst, recently covered AMZN’s Q2 report and the ensuing sell-off in an article on Yahoo Finance. She highlighted the company’s top-line results saying, “Amazon saw second-quarter net sales of $113 billion, up 27% but below expectations, dinging the shares, which fell more than 7% in late trading.” Goldsmith moved to the bottom-line results saying, “Net profit came in at a strong $7.8 billion, or $15.12 a share — up from $5.2 billion or $10.30.”
Goldsmith noted that Amazon’s subscription services (which help to bolster its valuation premium due to the predictable and high margin nature of these recurring sales) continued to grow nicely. She wrote, “Subscriptions services, which includes annual and monthly fees associated with Amazon Prime memberships, as well as digital video, audiobook, digital music, e-book, and other non-AWS subscription services, grew revenue by 32% to $7.9 billion”
During Q2, Amazon’s Amazon Web Services (AWS) cloud segment posted 37% revenue growth, with sales rising from $10.8 billion a year ago to $14.8 billion last quarter. And, as Goldsmith points out, “The company’s “other” segment, which primarily includes sales of advertising services, surged 83%, in line with strong digital advertising trends seen in this earnings round at Snap, Twitter, Google and others.”
In short, the company’s 27% sales growth and 50% net profit growth was fantastic - any company, regardless of market cap, would love to see these types of results. But, AMZN may be a victim of its own success because the market had even higher expectations for AMZN, leading to a sell-off.
Part of the stock’s weakness could have been due to the Q3 guidance that AMZN provided during the Q2 report:
“Net sales are expected to be between $106.0 billion and $112.0 billion, or to grow between 10% and 16% compared with third quarter 2020. This guidance anticipates a favorable impact of approximately 70 basis points from foreign exchange rates.
Operating income is expected to be between $2.5 billion and $6.0 billion, compared with $6.2 billion in third quarter 2020. This guidance assumes approximately $1.0 billion of costs related to COVID-19.”
This points towards a slowdown in growth due to the fact that the coming quarters are up against very strong comparisons due to the operational success that AMZN had during the COVID-19 pandemic. Billy Duberstein, a Nobias 4-star rated analyst, recently wrote an article where he touched upon the slowing eCommerce growth, but maintained a very bullish outlook on the stock saying, “while e-commerce is decelerating, Amazon's smaller but higher-profit segments are booming: Amazon Web Services (AWS) and digital advertising. In fact, if you strip out just those two segments, you could make a case that they are worth as much as Amazon's entire market cap right now; so even though e-commerce is slowing in the near-term, investors may be getting it pretty much for free.”
Regarding the more attractive margins coming from the AWS and advertising segments, he said, “In the second quarter, AWS accelerated 37% to $14.8 billion, up from 32% growth in the first quarter and the highest growth rate since before the pandemic. AWS is Amazon's highest-margin segment -- at least the highest that it discloses, with operating margins coming in at 29.4% over the past 12 months.”
Duberstein continued, “Meanwhile, Amazon's "other" category, which consists mostly of digital advertising, surged a whopping 83% to over $7.9 billion. Amazon doesn't disclose the profit margin it makes on advertising; however, large-scale rivals Alphabet and Facebook (FB) garnered ad services margins of 39.1% and 43% last quarter, respectively. Given how close Amazon's ads are to making a purchase on its platform, It wouldn't be unreasonable to assume Amazon's digital ads business is just as profitable as these other platforms.”
Duberstein compares the cash flow multiples that the market has placed on other cloud/advertising leaders to Amazon’s operations and arrives at the conclusion that, “If one applies these valuation multiples to AWS and advertising, it adds up to anywhere between $1.2 trillion and $1.6 trillion.”
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.
In short, the upper end of this valuation covers the company’s entire market cap at this point in time, implying that investors buying shares today are receiving the company’s entire eCommerce business “for free.” With this in mind, even though AMZN’s share price is quite high and the company’s valuation multiples are well above the market’s average, it appears that Amazon could very well be a value stock.
In a recent article titled “Warren Buffett Invests In These 3 Tech Stocks”, Jamal Carnette, CFA, a Nobias 4-star rated analyst, spoke about how Mr. Buffett, who is widely considered to be one of the world’s all-time best value investors, has recently begun to build a sizable position in AMZN shares.
Carnette wrote, “Although Amazon has been one of the best performing mega-cap stocks over the last decade, it took a little while for Berkshire to see the light. In response, Buffett displayed his famous self-deprecating wit when he called himself an "idiot" for not buying Amazon earlier while making it clear he did not direct the buy. Berkshire came around quickly and now owns a $1.8 billion stake in the e-commerce giant.” And, the Oracle of Omaha isn’t the only noteworthy investor/analyst that we track who is bullish on AMZN shares.
Right now, looking at the credible analysts that our algorithm tracks, 83% of individuals maintain a “Bullish” opinion on Amazon. The average analyst price target amongst the credible author community that we follow for AMZN is currently $4,191.11. Compared to AMZN’s share price at the close of the market on Friday, this represents upside potential of approximately 31.1%.
Disclosure: Of the companies mentioned in this article, Nicholas Ward is long AMZN, AAPL, MSFT, GOOGL, and FB. 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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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.