Here’s the deal with Amazon.com (AMZN): the company is making itself larger (more powerful) by spending money to expand (via more services like website hosting and more warehouses overseas). This expansion is hurting profitability. When (if) this is finished, AMZN will be an earnings juggernaut.
One Year Chart
Notice AMZN has steadily climbed higher in the face of declining or absent profitability. This move higher took me by surprise, as I used to own AMZN and sold it because I forecasted the slowdown in profit growth.
Although Estimates show 2000% profit growth coming 2QtrsOut, that probably won’t happen because the company has been lowering estimates/missing estimates for more than a year.
To see why AMZN is rising you have to look at future annual estimates:
2013 $1.47
2014 3.61
2015 7.01
2016 11.52
2017 17.29
The stock is rising because investors foresee how much money this company will eventually earn once it stops spending to grow. I don’t know if AMZN will stop spending to grow, it always keeps finding new avenues to delve into.
I’m also not putting too much faith into these earnings estimates because they are trending down, so don’t even think about the $10 or so the company could make in a couple of years. By then management might have something else to invest in and profits could be hurt from this. Still, this company looks to be an earnings juggernaut.
Fair Value
What’s AMZN worth? I’m just guessing this company is worth 45 times earnings, just ballparking. That means AMZN is really overvalued now, but if we look to 2014 its just merely overvalued. If AMZN makes $7.01 in 2015, then the stock would be worth $315 two years from now, or around 20% higher.
45 times $11.52 (2016’s estimate) is $518. That’s around a double from here. I think you have to think AMZN is a must-own for a growth stock portfolio, the trouble is where do you buy it?
Sharek’s Take
Amazon.com has the ability to be an earnings juggernaut, and I feel this is a core holding for growth stock investors. I think you just have to pick a good spot to buy in, and hold for the long run.
The stock market’s been on a long run higher this year, and I feel we could have a correction anytime. I think AMZN is a great stock to buy on a dip. The stock’s rise has shown me that smart money is backing AMZN stock and it would be a smart idea if we joined them, so don’t be fearful buying on a correction — this stock has support. Look to buy AMZN if it gets close to $225, I know I will.
View the Earnings Table here. View the Ten Year Chart here.
