Did Amazon’s Misstep Last Qtr Doesn’t Hurt its Long Term Outlook?

Stock (Symbol)

Amazon.com (AMZN)

Stock Price

$755

Sector
Retail & Travel
Data is as of
November 7, 2016
Expected to Report
Jan 26 – 30
Company Description
amazon-videoAmazon.com, Inc. (Amazon.com) is an e-commerce company. The Company’s products are offered through consumer-facing Websites, which include merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. It designs its Websites to enable products to be sold by the Company and by third parties across various product categories. It also manufactures and sells electronic devices, including Kindle e-readers, Fire tablets, Fire TVs, Echo and Fire phones. Amazon.com operates in two segments: North America and International. The North America segment focuses on retail sales earned through North America-focused Websites. The International segment focuses on the Company’s operations done through its international Websites. It serves developers and enterprises through Amazon Web Services (AWS). It serves authors and independent publishers with Kindle Direct Publishing. Source: Thomson Financial
Sharek’s Take
David SharekAmazon.com (AMZN) had a misstep last qtr. Before last qtr the past four qtrs AMZN’s profits per share had jumped from $0.17 to $1.00, $1.07 and $1.78 last qtr. Then last qtr the company was expected to make $0.78 and missed the mark instead of beating as it had the prior two qtrs. Still, sales growth was solid as overall sales rose 29% as Amazon Web Services revenue grew 55%. After spending to grow since 2011, the company has now reached an inflection point and profits are rolling in. Amazon made just over $1 in profits last year and is now expected to make around $5 this year, $10 next year, $16 in 2018 and $24 in 2019. That kind of projection is unfathomable. Amazon Web Services (AWS), which stores data on a cloud, is in my opinion the reason for the profit surge as sales are growing around 50% with a +20% profit margin. For comparisons, AMZN makes just 4% on North American product sales. Another catalyst is Fulfilment by Amazon where businesses send their products to Amazon, which then packages and ships when an order is placed. The goods are eligible for Amazon Prime and Super Saver Shipping. With Amazon Prime you get free 2-day shipping on products as well as Fire TV with a Netflix-type entertainment offering for $99 a year. AMZN stock has pulled back a bit since it reported, because of the profit miss and a rotation into bank stocks. But this stock is hitting support here at $750 and this is a good time to take a position if you haven’t already.
One Year Chart
amzn_2016_q4Not only did AMZN miss last qtr, but estimates came down a bit too. Still, the company delivered 206% profit growth last qtr which is still triple-digit growth. Looking ahead, 37%, 67%, 33% and 233% profit growth is estimated for the next 4 qtrs, which is solid even though these numbers were reduced. AMZN finally has a P/E below 100 as it sells for 84x 2017 profit estimates. The Est. LTG of 42% is very, very good.
Fair Value
amzn_2016_q4_phFor the first time ever, I can finally calculate a real Fair Value for Amazon. In the past I couldn’t because the profit estimates were so low you just had to assume or hope the stock would go higher. Now there’s solid profits to work with. Yes, a Fair Value of 75x earnings is high, but with profits rising so rapidly this stock deserves a high valuation. My 2017 Fair Value is $676, which is less than the current price. But 2018’s is a robust $1200 per share and is more than 50% higher than this qtr’s stock price.
Bottom Line
amzn_2016_q4_10yrAlthough Amazon didn’t perform as expected last qtr, the long-term future is still very bright as profits are expected to climb from $1 to $24 in a four-year time span. What’s more, Amazon’s sheer size makes it easy for big funds to take a position. AMZN ranks 6th in the Growth Portfolio and Aggressive Growth Portfolio Power Rankings. This dip is a good time for investors to build or increase their position.
Power Rankings
Growth Stock Portfolio

6 of 35

Aggressive Growth Portfolio

6 of 18

Conservative Stock Portfolio

N/A

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